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Republic of the Philippines


SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-28896 February 17, 1988

COMMISSIONER OF INTERNAL REVENUE, petitioner,


vs.
ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.

CRUZ, J.:

Taxes are the lifeblood of the government and so should be collected without unnecessary
hindrance On the other hand, such collection should be made in accordance with law as any
arbitrariness will negate the very reason for government itself. It is therefore necessary to
reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real
purpose of taxation, which is the promotion of the common good, may be achieved.

The main issue in this case is whether or not the Collector of Internal Revenue correctly
disallowed the P75,000.00 deduction claimed by private respondent Algue as legitimate business
expenses in its income tax returns. The corollary issue is whether or not the appeal of the private
respondent from the decision of the Collector of Internal Revenue was made on time and in
accordance with law.

We deal first with the procedural question.

The record shows that on January 14, 1965, the private respondent, a domestic corporation
engaged in engineering, construction and other allied activities, received a letter from the
petitioner assessing it in the total amount of P83,183.85 as delinquency income taxes for the years
1958 and 1959.1 On January 18, 1965, Algue flied a letter of protest or request for
reconsideration, which letter was stamp received on the same day in the office of the petitioner. 2
On March 12, 1965, a warrant of distraint and levy was presented to the private respondent,
through its counsel, Atty. Alberto Guevara, Jr., who refused to receive it on the ground of the
pending protest. 3 A search of the protest in the dockets of the case proved fruitless. Atty. Guevara
produced his file copy and gave a photostat to BIR agent Ramon Reyes, who deferred service of
the warrant. 4 On April 7, 1965, Atty. Guevara was finally informed that the BIR was not taking
any action on the protest and it was only then that he accepted the warrant of distraint and levy
earlier sought to be served.5 Sixteen days later, on April 23, 1965, Algue filed a petition for review
of the decision of the Commissioner of Internal Revenue with the Court of Tax Appeals.6

The above chronology shows that the petition was filed seasonably. According to Rep. Act No.
1125, the appeal may be made within thirty days after receipt of the decision or ruling
challenged.7 It is true that as a rule the warrant of distraint and levy is "proof of the finality of the
assessment" 8 and renders hopeless a request for reconsideration," 9 being "tantamount to an
outright denial thereof and makes the said request deemed rejected." 10 But there is a special
circumstance in the case at bar that prevents application of this accepted doctrine.

The proven fact is that four days after the private respondent received the petitioner's notice of
assessment, it filed its letter of protest. This was apparently not taken into account before the
warrant of distraint and levy was issued; indeed, such protest could not be located in the office of
the petitioner. It was only after Atty. Guevara gave the BIR a copy of the protest that it was, if at
all, considered by the tax authorities. During the intervening period, the warrant was premature
and could therefore not be served.

As the Court of Tax Appeals correctly noted," 11 the protest filed by private respondent was not
pro forma and was based on strong legal considerations. It thus had the effect of suspending on
January 18, 1965, when it was filed, the reglementary period which started on the date the
assessment was received, viz., January 14, 1965. The period started running again only on April 7,
1965, when the private respondent was definitely informed of the implied rejection of the said
protest and the warrant was finally served on it. Hence, when the appeal was filed on April 23,
1965, only 20 days of the reglementary period had been consumed.

Now for the substantive question.

The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed
because it was not an ordinary reasonable or necessary business expense. The Court of Tax
Appeals had seen it differently. Agreeing with Algue, it held that the said amount had been
legitimately paid by the private respondent for actual services rendered. The payment was in the
form of promotional fees. These were collected by the Payees for their work in the creation of the
Vegetable Oil Investment Corporation of the Philippines and its subsequent purchase of the
properties of the Philippine Sugar Estate Development Company.

Parenthetically, it may be observed that the petitioner had Originally claimed these promotional
fees to be personal holding company income 12 but later conformed to the decision of the
respondent court rejecting this assertion.13 In fact, as the said court found, the amount was earned
through the joint efforts of the persons among whom it was distributed It has been established that
the Philippine Sugar Estate Development Company had earlier appointed Algue as its agent,
authorizing it to sell its land, factories and oil manufacturing process. Pursuant to such authority,
Alberto Guevara, Jr., Eduardo Guevara, Isabel Guevara, Edith, O'Farell, and Pablo Sanchez,
worked for the formation of the Vegetable Oil Investment Corporation, inducing other persons to
invest in it.14 Ultimately, after its incorporation largely through the promotion of the said persons,
this new corporation purchased the PSEDC properties.15 For this sale, Algue received as agent a
commission of P126,000.00, and it was from this commission that the P75,000.00 promotional
fees were paid to the aforenamed individuals.16

There is no dispute that the payees duly reported their respective shares of the fees in their income
tax returns and paid the corresponding taxes thereon.17 The Court of Tax Appeals also found, after
examining the evidence, that no distribution of dividends was involved.18

The petitioner claims that these payments are fictitious because most of the payees are members of
the same family in control of Algue. It is argued that no indication was made as to how such
payments were made, whether by check or in cash, and there is not enough substantiation of such
payments. In short, the petitioner suggests a tax dodge, an attempt to evade a legitimate
assessment by involving an imaginary deduction.

We find that these suspicions were adequately met by the private respondent when its President,
Alberto Guevara, and the accountant, Cecilia V. de Jesus, testified that the payments were not
made in one lump sum but periodically and in different amounts as each payee's need arose. 19 It
should be remembered that this was a family corporation where strict business procedures were
not applied and immediate issuance of receipts was not required. Even so, at the end of the year,
when the books were to be closed, each payee made an accounting of all of the fees received by
him or her, to make up the total of P75,000.00. 20 Admittedly, everything seemed to be informal.
This arrangement was understandable, however, in view of the close relationship among the
persons in the family corporation.

We agree with the respondent court that the amount of the promotional fees was not excessive.
The total commission paid by the Philippine Sugar Estate Development Co. to the private
respondent was P125,000.00. 21 After deducting the said fees, Algue still had a balance of
P50,000.00 as clear profit from the transaction. The amount of P75,000.00 was 60% of the total
commission. This was a reasonable proportion, considering that it was the payees who did
practically everything, from the formation of the Vegetable Oil Investment Corporation to the
actual purchase by it of the Sugar Estate properties. This finding of the respondent court is in
accord with the following provision of the Tax Code:

SEC. 30. Deductions from gross income.--In computing net income there shall be allowed as
deductions —

(a) Expenses:

(1) In general.--All the ordinary and necessary expenses paid or incurred during the taxable year
in carrying on any trade or business, including a reasonable allowance for salaries or other
compensation for personal services actually rendered; ... 22

and Revenue Regulations No. 2, Section 70 (1), reading as follows:

SEC. 70. Compensation for personal services.--Among the ordinary and necessary expenses paid
or incurred in carrying on any trade or business may be included a reasonable allowance for
salaries or other compensation for personal services actually rendered. The test of deductibility in
the case of compensation payments is whether they are reasonable and are, in fact, payments
purely for service. This test and deductibility in the case of compensation payments is whether
they are reasonable and are, in fact, payments purely for service. This test and its practical
application may be further stated and illustrated as follows:

Any amount paid in the form of compensation, but not in fact as the purchase price of services, is
not deductible. (a) An ostensible salary paid by a corporation may be a distribution of a dividend
on stock. This is likely to occur in the case of a corporation having few stockholders, Practically
all of whom draw salaries. If in such a case the salaries are in excess of those ordinarily paid for
similar services, and the excessive payment correspond or bear a close relationship to the
stockholdings of the officers of employees, it would seem likely that the salaries are not paid
wholly for services rendered, but the excessive payments are a distribution of earnings upon the
stock. . . . (Promulgated Feb. 11, 1931, 30 O.G. No. 18, 325.)

It is worth noting at this point that most of the payees were not in the regular employ of Algue nor
were they its controlling stockholders. 23

The Solicitor General is correct when he says that the burden is on the taxpayer to prove the
validity of the claimed deduction. In the present case, however, we find that the onus has been
discharged satisfactorily. The private respondent has proved that the payment of the fees was
necessary and reasonable in the light of the efforts exerted by the payees in inducing investors and
prominent businessmen to venture in an experimental enterprise and involve themselves in a new
business requiring millions of pesos. This was no mean feat and should be, as it was, sufficiently
recompensed.

It is said that taxes are what we pay for civilization society. Without taxes, the government would
be paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural
reluctance to surrender part of one's hard earned income to the taxing authorities, every person
who is able to must contribute his share in the running of the government. The government for its
part, is expected to respond in the form of tangible and intangible benefits intended to improve the
lives of the people and enhance their moral and material values. This symbiotic relationship is the
rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of
exaction by those in the seat of power.

But even as we concede the inevitability and indispensability of taxation, it is a requirement in all
democratic regimes that it be exercised reasonably and in accordance with the prescribed
procedure. If it is not, then the taxpayer has a right to complain and the courts will then come to
his succor. For all the awesome power of the tax collector, he may still be stopped in his tracks if
the taxpayer can demonstrate, as it has here, that the law has not been observed.

We hold that the appeal of the private respondent from the decision of the petitioner was filed on
time with the respondent court in accordance with Rep. Act No. 1125. And we also find that the
claimed deduction by the private respondent was permitted under the Internal Revenue Code and
should therefore not have been disallowed by the petitioner.

ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in toto,
without costs.

SO ORDERED.

Teehankee, C.J., Narvasa, Gancayco and Griño-Aquino, JJ., concur.

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Republic of the Philippines


SUPREME COURT
Manila

EN BANC
G.R. No. L- 41383 August 15, 1988

PHILIPPINE AIRLINES, INC., plaintiff-appellant,


vs.
ROMEO F. EDU in his capacity as Land Transportation Commissioner, and UBALDO
CARBONELL, in his capacity as National Treasurer, defendants-appellants.

Ricardo V. Puno, Jr. and Conrado A. Boro for plaintiff-appellant.

GUTIERREZ, JR., J.:

What is the nature of motor vehicle registration fees? Are they taxes or regulatory fees?

This question has been brought before this Court in the past. The parties are, in effect, asking for a
re-examination of the latest decision on this issue.

This appeal was certified to us as one involving a pure question of law by the Court of Appeals in
a case where the then Court of First Instance of Rizal dismissed the portion-about complaint for
refund of registration fees paid under protest.

The disputed registration fees were imposed by the appellee, Commissioner Romeo F. Elevate
pursuant to Section 8, Republic Act No. 4136, otherwise known as the Land Transportation and
Traffic Code.

The Philippine Airlines (PAL) is a corporation organized and existing under the laws of the
Philippines and engaged in the air transportation business under a legislative franchise, Act No.
42739, as amended by Republic Act Nos. 25). and 269.1 Under its franchise, PAL is exempt from
the payment of taxes. The pertinent provision of the franchise provides as follows:

Section 13. In consideration of the franchise and rights hereby granted, the grantee shall pay to
the National Government during the life of this franchise a tax of two per cent of the gross revenue
or gross earning derived by the grantee from its operations under this franchise. Such tax shall be
due and payable quarterly and shall be in lieu of all taxes of any kind, nature or description,
levied, established or collected by any municipal, provincial or national automobiles, Provided,
that if, after the audit of the accounts of the grantee by the Commissioner of Internal Revenue, a
deficiency tax is shown to be due, the deficiency tax shall be payable within the ten days from the
receipt of the assessment. The grantee shall pay the tax on its real property in conformity with
existing law.

On the strength of an opinion of the Secretary of Justice (Op. No. 307, series of 1956) PAL has,
since 1956, not been paying motor vehicle registration fees.

Sometime in 1971, however, appellee Commissioner Romeo F. Elevate issued a regulation


requiring all tax exempt entities, among them PAL to pay motor vehicle registration fees.

Despite PAL's protestations, the appellee refused to register the appellant's motor vehicles unless
the amounts imposed under Republic Act 4136 were paid. The appellant thus paid, under protest,
the amount of P19,529.75 as registration fees of its motor vehicles.

After paying under protest, PAL through counsel, wrote a letter dated May 19,1971, to
Commissioner Edu demanding a refund of the amounts paid, invoking the ruling in Calalang v.
Lorenzo (97 Phil. 212 [1951]) where it was held that motor vehicle registration fees are in reality
taxes from the payment of which PAL is exempt by virtue of its legislative franchise.

Appellee Edu denied the request for refund basing his action on the decision in Republic v.
Philippine Rabbit Bus Lines, Inc., (32 SCRA 211, March 30, 1970) to the effect that motor vehicle
registration fees are regulatory exceptional. and not revenue measures and, therefore, do not come
within the exemption granted to PAL? under its franchise. Hence, PAL filed the complaint against
Land Transportation Commissioner Romeo F. Edu and National Treasurer Ubaldo Carbonell with
the Court of First Instance of Rizal, Branch 18 where it was docketed as Civil Case No. Q-15862.

Appellee Romeo F. Elevate in his capacity as LTC Commissioner, and LOI Carbonell in his
capacity as National Treasurer, filed a motion to dismiss alleging that the complaint states no
cause of action. In support of the motion to dismiss, defendants repatriation the ruling in Republic
v. Philippine Rabbit Bus Lines, Inc., (supra) that registration fees of motor vehicles are not taxes,
but regulatory fees imposed as an incident of the exercise of the police power of the state. They
contended that while Act 4271 exempts PAL from the payment of any tax except two per cent on
its gross revenue or earnings, it does not exempt the plaintiff from paying regulatory fees, such as
motor vehicle registration fees. The resolution of the motion to dismiss was deferred by the Court
until after trial on the merits.

On April 24, 1973, the trial court rendered a decision dismissing the appellant's complaint "moved
by the later ruling laid down by the Supreme Court in the case or Republic v. Philippine Rabbit
Bus Lines, Inc., (supra)." From this judgment, PAL appealed to the Court of Appeals which
certified the case to us.

Calalang v. Lorenzo (supra) and Republic v. Philippine Rabbit Bus Lines, Inc. (supra) cited by
PAL and Commissioner Romeo F. Edu respectively, discuss the main points of contention in the
case at bar.

Resolving the issue in the Philippine Rabbit case, this Court held:

"The registration fee which defendant-appellee had to pay was imposed by Section 8 of the
Revised Motor Vehicle Law (Republic Act No. 587 [1950]). Its heading speaks of "registration
fees." The term is repeated four times in the body thereof. Equally so, mention is made of the "fee
for registration." (Ibid., Subsection G) A subsection starts with a categorical statement "No fees
shall be charged." (lbid., Subsection H) The conclusion is difficult to resist therefore that the
Motor Vehicle Act requires the payment not of a tax but of a registration fee under the police
power. Hence the incipient, of the section relied upon by defendant-appellee under the Back Pay
Law, It is not held liable for a tax but for a registration fee. It therefore cannot make use of a
backpay certificate to meet such an obligation.

Any vestige of any doubt as to the correctness of the above conclusion should be dissipated by
Republic Act No. 5448. ([1968]. Section 3 thereof as to the imposition of additional tax on
privately-owned passenger automobiles, motorcycles and scooters was amended by Republic Act
No. 5470 which is (sic) approved on May 30, 1969.) A special science fund was thereby created
and its title expressly sets forth that a tax on privately-owned passenger automobiles, motorcycles
and scooters was imposed. The rates thereof were provided for in its Section 3 which clearly
specifies the" Philippine tax."(Cooley to be paid as distinguished from the registration fee under
the Motor Vehicle Act. There cannot be any clearer expression therefore of the legislative will,
even on the assumption that the earlier legislation could by subdivision the point be susceptible of
the interpretation that a tax rather than a fee was levied. What is thus most apparent is that where
the legislative body relies on its authority to tax it expressly so states, and where it is enacting a
regulatory measure, it is equally exploded (at p. 22,1969

In direct refutation is the ruling in Calalang v. Lorenzo (supra), where the Court, on the other
hand, held:

The charges prescribed by the Revised Motor Vehicle Law for the registration of motor vehicles
are in section 8 of that law called "fees". But the appellation is no impediment to their being
considered taxes if taxes they really are. For not the name but the object of the charge determines
whether it is a tax or a fee. Geveia speaking, taxes are for revenue, whereas fees are exceptional.
for purposes of regulation and inspection and are for that reason limited in amount to what is
necessary to cover the cost of the services rendered in that connection. Hence, a charge fixed by
statute for the service to be person,-When by an officer, where the charge has no relation to the
value of the services performed and where the amount collected eventually finds its way into the
treasury of the branch of the government whose officer or officers collected the chauffeur, is not a
fee but a tax."(Cooley on Taxation, Vol. 1, 4th ed., p. 110.)

From the data submitted in the court below, it appears that the expenditures of the Motor Vehicle
Office are but a small portion—about 5 per centum—of the total collections from motor vehicle
registration fees. And as proof that the money collected is not intended for the expenditures of that
office, the law itself provides that all such money shall accrue to the funds for the construction and
maintenance of public roads, streets and bridges. It is thus obvious that the fees are not collected
for regulatory purposes, that is to say, as an incident to the enforcement of regulations governing
the operation of motor vehicles on public highways, for their express object is to provide revenue
with which the Government is to discharge one of its principal functions—the construction and
maintenance of public highways for everybody's use. They are veritable taxes, not merely fees.

As a matter of fact, the Revised Motor Vehicle Law itself now regards those fees as taxes, for it
provides that "no other taxes or fees than those prescribed in this Act shall be imposed," thus
implying that the charges therein imposed—though called fees—are of the category of taxes. The
provision is contained in section 70, of subsection (b), of the law, as amended by section 17 of
Republic Act 587, which reads:

Sec. 70(b) No other taxes or fees than those prescribed in this Act shall be imposed for the
registration or operation or on the ownership of any motor vehicle, or for the exercise of the
profession of chauffeur, by any municipal corporation, the provisions of any city charter to the
contrary notwithstanding: Provided, however, That any provincial board, city or municipal council
or board, or other competent authority may exact and collect such reasonable and equitable toll
fees for the use of such bridges and ferries, within their respective jurisdiction, as may be
authorized and approved by the Secretary of Public Works and Communications, and also for the
use of such public roads, as may be authorized by the President of the Philippines upon the
recommendation of the Secretary of Public Works and Communications, but in none of these
cases, shall any toll fee." be charged or collected until and unless the approved schedule of tolls
shall have been posted levied, in a conspicuous place at such toll station. (at pp. 213-214)

Motor vehicle registration fees were matters originally governed by the Revised Motor Vehicle
Law (Act 3992 [19511) as amended by Commonwealth Act 123 and Republic Acts Nos. 587 and
1621.

Today, the matter is governed by Rep. Act 4136 [1968]), otherwise known as the Land
Transportation Code, (as amended by Rep. Acts Nos. 5715 and 64-67, P.D. Nos. 382, 843, 896,
110.) and BP Blg. 43, 74 and 398).

Section 73 of Commonwealth Act 123 (which amended Sec. 73 of Act 3992 and remained
unsegregated, by Rep. Act Nos. 587 and 1603) states:

Section 73. Disposal of moneys collected.—Twenty per centum of the money collected under
the provisions of this Act shall accrue to the road and bridge funds of the different provinces and
chartered cities in proportion to the centum shall during the next previous year and the remaining
eighty per centum shall be deposited in the Philippine Treasury to create a special fund for the
construction and maintenance of national and provincial roads and bridges. as well as the streets
and bridges in the chartered cities to be alloted by the Secretary of Public Works and
Communications for projects recommended by the Director of Public Works in the different
provinces and chartered cities. ....

Presently, Sec. 61 of the Land Transportation and Traffic Code provides:

Sec. 61. Disposal of Mortgage. Collected—Monies collected under the provisions of this Act
shall be deposited in a special trust account in the National Treasury to constitute the Highway
Special Fund, which shall be apportioned and expended in accordance with the provisions of the"
Philippine Highway Act of 1935. "Provided, however, That the amount necessary to maintain and
equip the Land Transportation Commission but not to exceed twenty per cent of the total
collection during one year, shall be set aside for the purpose. (As amended by RA 64-67, approved
August 6, 1971).

It appears clear from the above provisions that the legislative intent and purpose behind the law
requiring owners of vehicles to pay for their registration is mainly to raise funds for the
construction and maintenance of highways and to a much lesser degree, pay for the operating
expenses of the administering agency. On the other hand, the Philippine Rabbit case mentions a
presumption arising from the use of the term "fees," which appears to have been favored by the
legislature to distinguish fees from other taxes such as those mentioned in Section 13 of Rep. Act
4136 which reads:

Sec. 13. Payment of taxes upon registration.—No original registration of motor vehicles subject
to payment of taxes, customs s duties or other charges shall be accepted unless proof of payment
of the taxes due thereon has been presented to the Commission.

referring to taxes other than those imposed on the registration, operation or ownership of a motor
vehicle (Sec. 59, b, Rep. Act 4136, as amended).

Fees may be properly regarded as taxes even though they also serve as an instrument of
regulation, As stated by a former presiding judge of the Court of Tax Appeals and writer on
various aspects of taxpayers

It is possible for an exaction to be both tax arose. regulation. License fees are changes. looked to
as a source of revenue as well as a means of regulation (Sonzinky v. U.S., 300 U.S. 506) This is
true, for example, of automobile license fees. Isabela such case, the fees may properly be regarded
as taxes even though they also serve as an instrument of regulation. If the purpose is primarily
revenue, or if revenue is at least one of the real and substantial purposes, then the exaction is
properly called a tax. (1955 CCH Fed. tax Course, Par. 3101, citing Cooley on Taxation (2nd Ed.)
592, 593; Calalang v. Lorenzo. 97 Phil. 213-214) Lutz v. Araneta 98 Phil. 198.) These exactions
are sometimes called regulatory taxes. (See Secs. 4701, 4711, 4741, 4801, 4811, 4851, and 4881,
U.S. Internal Revenue Code of 1954, which classify taxes on tobacco and alcohol as regulatory
taxes.) (Umali, Reviewer in Taxation, 1980, pp. 12-13, citing Cooley on Taxation, 2nd Edition,
591-593).

Indeed, taxation may be made the implement of the state's police power (Lutz v. Araneta, 98 Phil.
148).

If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial
purposes, then the exaction is properly called a tax (Umali, Id.) Such is the case of motor vehicle
registration fees. The conclusions become inescapable in view of Section 70(b) of Rep. Act 587
quoted in the Calalang case. The same provision appears as Section 591-593). in the Land
Transportation code. It is patent therefrom that the legislators had in mind a regulatory tax as the
law refers to the imposition on the registration, operation or ownership of a motor vehicle as a "tax
or fee." Though nowhere in Rep. Act 4136 does the law specifically state that the imposition is a
tax, Section 591-593). speaks of "taxes." or fees ... for the registration or operation or on the
ownership of any motor vehicle, or for the exercise of the profession of chauffeur ..." making the
intent to impose a tax more apparent. Thus, even Rep. Act 5448 cited by the respondents, speak of
an "additional" tax," where the law could have referred to an original tax and not one in addition
to the tax already imposed on the registration, operation, or ownership of a motor vehicle under
Rep. Act 41383. Simply put, if the exaction under Rep. Act 4136 were merely a regulatory fee, the
imposition in Rep. Act 5448 need not be an "additional" tax. Rep. Act 4136 also speaks of other
"fees," such as the special permit fees for certain types of motor vehicles (Sec. 10) and additional
fees for change of registration (Sec. 11). These are not to be understood as taxes because such fees
are very minimal to be revenue-raising. Thus, they are not mentioned by Sec. 591-593). of the
Code as taxes like the motor vehicle registration fee and chauffers' license fee. Such fees are to go
into the expenditures of the Land Transportation Commission as provided for in the last proviso of
see. 61, aforequoted.

It is quite apparent that vehicle registration fees were originally simple exceptional. intended only
for rigidly purposes in the exercise of the State's police powers. Over the years, however, as
vehicular traffic exploded in number and motor vehicles became absolute necessities without
which modem life as we know it would stand still, Congress found the registration of vehicles a
very convenient way of raising much needed revenues. Without changing the earlier deputy. of
registration payments as "fees," their nature has become that of "taxes."

In view of the foregoing, we rule that motor vehicle registration fees as at present exacted
pursuant to the Land Transportation and Traffic Code are actually taxes intended for additional
revenues. of government even if one fifth or less of the amount collected is set aside for the
operating expenses of the agency administering the program.

May the respondent administrative agency be required to refund the amounts stated in the
complaint of PAL?

The answer is NO.

The claim for refund is made for payments given in 1971. It is not clear from the records as to
what payments were made in succeeding years. We have ruled that Section 24 of Rep. Act No.
5448 dated June 27, 1968, repealed all earlier tax exemptions Of corporate taxpayers found in
legislative franchises similar to that invoked by PAL in this case.

In Radio Communications of the Philippines, Inc. v. Court of Tax Appeals, et al. (G.R. No. 615)."
July 11, 1985), this Court ruled:

Under its original franchise, Republic Act No. 21); enacted in 1957, petitioner Radio
Communications of the Philippines, Inc., was subject to both the franchise tax and income tax. In
1964, however, petitioner's franchise was amended by Republic Act No. 41-42). to the effect that
its franchise tax of one and one-half percentum (1-1/2%) of all gross receipts was provided as "in
lieu of any and all taxes of any kind, nature, or description levied, established, or collected by any
authority whatsoever, municipal, provincial, or national from which taxes the grantee is hereby
expressly exempted." The issue raised to this Court now is the validity of the respondent court's
decision which ruled that the exemption under Republic Act No. 41-42). was repealed by Section
24 of Republic Act No. 5448 dated June 27, 1968 which reads:

"(d) The provisions of existing special or general laws to the contrary notwithstanding, all
corporate taxpayers not specifically exempt under Sections 24 (c) (1) of this Code shall pay the
rates provided in this section. All corporations, agencies, or instrumentalities owned or controlled
by the government, including the Government Service Insurance System and the Social Security
System but excluding educational institutions, shall pay such rate of tax upon their taxable net
income as are imposed by this section upon associations or corporations engaged in a similar
business or industry. "

An examination of Section 24 of the Tax Code as amended shows clearly that the law intended all
corporate taxpayers to pay income tax as provided by the statute. There can be no doubt as to the
power of Congress to repeal the earlier exemption it granted. Article XIV, Section 8 of the 1935
Constitution and Article XIV, Section 5 of the Constitution as amended in 1973 expressly provide
that no franchise shall be granted to any individual, firm, or corporation except under the
condition that it shall be subject to amendment, alteration, or repeal by the legislature when the
public interest so requires. There is no question as to the public interest involved. The country
needs increased revenues. The repealing clause is clear and unambiguous. There is a listing of
entities entitled to tax exemption. The petitioner is not covered by the provision. Considering the
foregoing, the Court Resolved to DENY the petition for lack of merit. The decision of the
respondent court is affirmed.

Any registration fees collected between June 27, 1968 and April 9, 1979, were correctly imposed
because the tax exemption in the franchise of PAL was repealed during the period. However, an
amended franchise was given to PAL in 1979. Section 13 of Presidential Decree No. 1590, now
provides:

In consideration of the franchise and rights hereby granted, the grantee shall pay to the Philippine
Government during the lifetime of this franchise whichever of subsections (a) and (b) hereunder
will result in a lower taxes.)

(a) The basic corporate income tax based on the grantee's annual net taxable income computed in
accordance with the provisions of the Internal Revenue Code; or

(b) A franchise tax of two per cent (2%) of the gross revenues. derived by the grantees from all
specific. without distinction as to transport or nontransport corporations; provided that with
respect to international airtransport service, only the gross passengers, mail, and freight revenues.
from its outgoing flights shall be subject to this law.

The tax paid by the grantee under either of the above alternatives shall be in lieu of all other taxes,
duties, royalties, registration, license and other fees and charges of any kind, nature or description
imposed, levied, established, assessed, or collected by any municipal, city, provincial, or national
authority or government, agency, now or in the future, including but not limited to the following:

xxx xxx xxx

(5) All taxes, fees and other charges on the registration, license, acquisition, and transfer of
airtransport equipment, motor vehicles, and all other personal or real property of the gravitates
(Pres. Decree 1590, 75 OG No. 15, 3259, April 9, 1979).

PAL's current franchise is clear and specific. It has removed the ambiguity found in the earlier law.
PAL is now exempt from the payment of any tax, fee, or other charge on the registration and
licensing of motor vehicles. Such payments are already included in the basic tax or franchise tax
provided in Subsections (a) and (b) of Section 13, P.D. 1590, and may no longer be exacted.

WHEREFORE, the petition is hereby partially GRANTED. The prayed for refund of registration
fees paid in 1971 is DENIED. The Land Transportation Franchising and Regulatory Board
(LTFRB) is enjoined functions-the collecting any tax, fee, or other charge on the registration and
licensing of the petitioner's motor vehicles from April 9, 1979 as provided in Presidential Decree
No. 1590.

SO ORDERED.

Fernan, C.J., Narvasa, Melencio-Herrera, Cruz, Paras, Feliciano, Gancayco, Padilla, Bidin,
Sarmiento, Cortes, Griño Aquino and Medialdea, JJ., concur.

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Republic of the Philippines


SUPREME COURT
Manila

FIRST DIVISION

G.R. Nos. L-28508-9 July 7, 1989

ESSO STANDARD EASTERN, INC., (formerly, Standard-Vacuum Oil Company), petitioner,


vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.

Padilla Law Office for petitioner.

CRUZ, J.:

On appeal before us is the decision of the Court of Tax Appeals 1 denying petitioner's claims for
refund of overpaid income taxes of P102,246.00 for 1959 and P434,234.93 for 1960 in CTA Cases
No. 1251 and 1558 respectively.

In CTA Case No. 1251, petitioner ESSO deducted from its gross income for 1959, as part of its
ordinary and necessary business expenses, the amount it had spent for drilling and exploration of
its petroleum concessions. This claim was disallowed by the respondent Commissioner of Internal
Revenue on the ground that the expenses should be capitalized and might be written off as a loss
only when a "dry hole" should result. ESSO then filed an amended return where it asked for the
refund of P323,279.00 by reason of its abandonment as dry holes of several of its oil wells. Also
claimed as ordinary and necessary expenses in the same return was the amount of P340,822.04,
representing margin fees it had paid to the Central Bank on its profit remittances to its New York
head office.

On August 5, 1964, the CIR granted a tax credit of P221,033.00 only, disallowing the claimed
deduction for the margin fees paid.

In CTA Case No. 1558, the CR assessed ESSO a deficiency income tax for the year 1960, in the
amount of P367,994.00, plus 18% interest thereon of P66,238.92 for the period from April
18,1961 to April 18, 1964, for a total of P434,232.92. The deficiency arose from the disallowance
of the margin fees of Pl,226,647.72 paid by ESSO to the Central Bank on its profit remittances to
its New York head office.

ESSO settled this deficiency assessment on August 10, 1964, by applying the tax credit of
P221,033.00 representing its overpayment on its income tax for 1959 and paying under protest the
additional amount of P213,201.92. On August 13, 1964, it claimed the refund of P39,787.94 as
overpayment on the interest on its deficiency income tax. It argued that the 18% interest should
have been imposed not on the total deficiency of P367,944.00 but only on the amount of
P146,961.00, the difference between the total deficiency and its tax credit of P221,033.00.

This claim was denied by the CIR, who insisted on charging the 18% interest on the entire amount
of the deficiency tax. On May 4,1965, the CIR also denied the claims of ESSO for refund of the
overpayment of its 1959 and 1960 income taxes, holding that the margin fees paid to the Central
Bank could not be considered taxes or allowed as deductible business expenses.

ESSO appealed to the CTA and sought the refund of P102,246.00 for 1959, contending that the
margin fees were deductible from gross income either as a tax or as an ordinary and necessary
business expense. It also claimed an overpayment of its tax by P434,232.92 in 1960, for the same
reason. Additionally, ESSO argued that even if the amount paid as margin fees were not legally
deductible, there was still an overpayment by P39,787.94 for 1960, representing excess interest.

After trial, the CTA denied petitioner's claim for refund of P102,246.00 for 1959 and P434,234.92
for 1960 but sustained its claim for P39,787.94 as excess interest. This portion of the decision was
appealed by the CIR but was affirmed by this Court in Commissioner of Internal Revenue v.
ESSO, G.R. No. L-28502- 03, promulgated on April 18, 1989. ESSO for its part appealed the CTA
decision denying its claims for the refund of the margin fees P102,246.00 for 1959 and
P434,234.92 for 1960. That is the issue now before us.

II

The first question we must settle is whether R.A. 2009, entitled An Act to Authorize the Central
Bank of the Philippines to Establish a Margin Over Banks' Selling Rates of Foreign Exchange, is a
police measure or a revenue measure. If it is a revenue measure, the margin fees paid by the
petitioner to the Central Bank on its profit remittances to its New York head office should be
deductible from ESSO's gross income under Sec. 30(c) of the National Internal Revenue Code.
This provides that all taxes paid or accrued during or within the taxable year and which are related
to the taxpayer's trade, business or profession are deductible from gross income.

The petitioner maintains that margin fees are taxes and cites the background and legislative history
of the Margin Fee Law showing that R.A. 2609 was nothing less than a revival of the 17% excise
tax on foreign exchange imposed by R.A. 601. This was a revenue measure formally proposed by
President Carlos P. Garcia to Congress as part of, and in order to balance, the budget for 1959-
1960. It was enacted by Congress as such and, significantly, properly originated in the House of
Representatives. During its two and a half years of existence, the measure was one of the major
sources of revenue used to finance the ordinary operating expenditures of the government. It was,
moreover, payable out of the General Fund.

On the claimed legislative intent, the Court of Tax Appeals, quoting established principles, pointed
out that —

We are not unmindful of the rule that opinions expressed in debates, actual proceedings of the
legislature, steps taken in the enactment of a law, or the history of the passage of the law through
the legislature, may be resorted to as an aid in the interpretation of a statute which is ambiguous or
of doubtful meaning. The courts may take into consideration the facts leading up to, coincident
with, and in any way connected with, the passage of the act, in order that they may properly
interpret the legislative intent. But it is also well-settled jurisprudence that only in extremely
doubtful matters of interpretation does the legislative history of an act of Congress become
important. As a matter of fact, there may be no resort to the legislative history of the enactment of
a statute, the language of which is plain and unambiguous, since such legislative history may only
be resorted to for the purpose of solving doubt, not for the purpose of creating it. [50 Am. Jur.
328.]

Apart from the above consideration, there are at least two cases where we have held that a margin
fee is not a tax but an exaction designed to curb the excessive demands upon our international
reserve.

In Caltex (Phil.) Inc. v. Acting Commissioner of Customs, 2 the Court stated through Justice Jose
P. Bengzon:

A margin levy on foreign exchange is a form of exchange control or restriction designed to


discourage imports and encourage exports, and ultimately, 'curtail any excessive demand upon the
international reserve' in order to stabilize the currency. Originally adopted to cope with balance of
payment pressures, exchange restrictions have come to serve various purposes, such as limiting
non-essential imports, protecting domestic industry and when combined with the use of multiple
currency rates providing a source of revenue to the government, and are in many developing
countries regarded as a more or less inevitable concomitant of their economic development
programs. The different measures of exchange control or restriction cover different phases of
foreign exchange transactions, i.e., in quantitative restriction, the control is on the amount of
foreign exchange allowable. In the case of the margin levy, the immediate impact is on the rate of
foreign exchange; in fact, its main function is to control the exchange rate without changing the
par value of the peso as fixed in the Bretton Woods Agreement Act. For a member nation is not
supposed to alter its exchange rate (at par value) to correct a merely temporary disequilibrium in
its balance of payments. By its nature, the margin levy is part of the rate of exchange as fixed by
the government.

As to the contention that the margin levy is a tax on the purchase of foreign exchange and hence
should not form part of the exchange rate, suffice it to state that We have already held the contrary
for the reason that a tax is levied to provide revenue for government operations, while the
proceeds of the margin fee are applied to strengthen our country's international reserves.

Earlier, in Chamber of Agriculture and Natural Resources of the Philippines v. Central Bank, 3 the
same idea was expressed, though in connection with a different levy, through Justice J.B.L. Reyes:

Neither do we find merit in the argument that the 20% retention of exporter's foreign exchange
constitutes an export tax. A tax is a levy for the purpose of providing revenue for government
operations, while the proceeds of the 20% retention, as we have seen, are applied to strengthen the
Central Bank's international reserve.

We conclude then that the margin fee was imposed by the State in the exercise of its police power
and not the power of taxation.

Alternatively, ESSO prays that if margin fees are not taxes, they should nevertheless be considered
necessary and ordinary business expenses and therefore still deductible from its gross income. The
fees were paid for the remittance by ESSO as part of the profits to the head office in the Unites
States. Such remittance was an expenditure necessary and proper for the conduct of its corporate
affairs.

The applicable provision is Section 30(a) of the National Internal Revenue Code reading as
follows:

SEC. 30. Deductions from gross income in computing net income there shall be allowed as
deductions

(a) Expenses:

(1) In general. — All the ordinary and necessary expenses paid or incurred during the taxable year
in carrying on any trade or business, including a reasonable allowance for salaries or other
compensation for personal services actually rendered; traveling expenses while away from home
in the pursuit of a trade or business; and rentals or other payments required to be made as a
condition to the continued use or possession, for the purpose of the trade or business, of property
to which the taxpayer has not taken or is not taking title or in which he has no equity.

(2) Expenses allowable to non-resident alien individuals and foreign corporations. — In the case
of a non-resident alien individual or a foreign corporation, the expenses deductible are the
necessary expenses paid or incurred in carrying on any business or trade conducted within the
Philippines exclusively.

In the case of Atlas Consolidated Mining and Development Corporation v. Commissioner of


Internal Revenue, 4 the Court laid down the rules on the deductibility of business expenses, thus:

The principle is recognized that when a taxpayer claims a deduction, he must point to some
specific provision of the statute in which that deduction is authorized and must be able to prove
that he is entitled to the deduction which the law allows. As previously adverted to, the law
allowing expenses as deduction from gross income for purposes of the income tax is Section 30(a)
(1) of the National Internal Revenue which allows a deduction of 'all the ordinary and necessary
expenses paid or incurred during the taxable year in carrying on any trade or business.' An item of
expenditure, in order to be deductible under this section of the statute, must fall squarely within its
language.

We come, then, to the statutory test of deductibility where it is axiomatic that to be deductible as a
business expense, three conditions are imposed, namely: (1) the expense must be ordinary and
necessary, (2) it must be paid or incurred within the taxable year, and (3) it must be paid or
incurred in carrying on a trade or business. In addition, not only must the taxpayer meet the
business test, he must substantially prove by evidence or records the deductions claimed under the
law, otherwise, the same will be disallowed. The mere allegation of the taxpayer that an item of
expense is ordinary and necessary does not justify its deduction.

While it is true that there is a number of decisions in the United States delving on the
interpretation of the terms 'ordinary and necessary' as used in the federal tax laws, no adequate or
satisfactory definition of those terms is possible. Similarly, this Court has never attempted to
define with precision the terms 'ordinary and necessary.' There are however, certain guiding
principles worthy of serious consideration in the proper adjudication of conflicting claims.
Ordinarily, an expense will be considered 'necessary' where the expenditure is appropriate and
helpful in the development of the taxpayer's business. It is 'ordinary' when it connotes a payment
which is normal in relation to the business of the taxpayer and the surrounding circumstances. The
term 'ordinary' does not require that the payments be habitual or normal in the sense that the same
taxpayer will have to make them often; the payment may be unique or non-recurring to the
particular taxpayer affected.

There is thus no hard and fast rule on the matter. The right to a deduction depends in each case on
the particular facts and the relation of the payment to the type of business in which the taxpayer is
engaged. The intention of the taxpayer often may be the controlling fact in making the
determination. Assuming that the expenditure is ordinary and necessary in the operation of the
taxpayer's business, the answer to the question as to whether the expenditure is an allowable
deduction as a business expense must be determined from the nature of the expenditure itself,
which in turn depends on the extent and permanency of the work accomplished by the
expenditure.
In the light of the above explanation, we hold that the Court of Tax Appeals did not err when it
held on this issue as follows:

Considering the foregoing test of what constitutes an ordinary and necessary deductible expense, it
may be asked: Were the margin fees paid by petitioner on its profit remittance to its Head Office in
New York appropriate and helpful in the taxpayer's business in the Philippines? Were the margin
fees incurred for purposes proper to the conduct of the affairs of petitioner's branch in the
Philippines? Or were the margin fees incurred for the purpose of realizing a profit or of
minimizing a loss in the Philippines? Obviously not. As stated in the Lopez case, the margin fees
are not expenses in connection with the production or earning of petitioner's incomes in the
Philippines. They were expenses incurred in the disposition of said incomes; expenses for the
remittance of funds after they have already been earned by petitioner's branch in the Philippines
for the disposal of its Head Office in New York which is already another distinct and separate
income taxpayer.

xxx

Since the margin fees in question were incurred for the remittance of funds to petitioner's Head
Office in New York, which is a separate and distinct income taxpayer from the branch in the
Philippines, for its disposal abroad, it can never be said therefore that the margin fees were
appropriate and helpful in the development of petitioner's business in the Philippines exclusively
or were incurred for purposes proper to the conduct of the affairs of petitioner's branch in the
Philippines exclusively or for the purpose of realizing a profit or of minimizing a loss in the
Philippines exclusively. If at all, the margin fees were incurred for purposes proper to the conduct
of the corporate affairs of Standard Vacuum Oil Company in New York, but certainly not in the
Philippines.

ESSO has not shown that the remittance to the head office of part of its profits was made in
furtherance of its own trade or business. The petitioner merely presumed that all corporate
expenses are necessary and appropriate in the absence of a showing that they are illegal or ultra
vires. This is error. The public respondent is correct when it asserts that "the paramount rule is that
claims for deductions are a matter of legislative grace and do not turn on mere equitable
considerations ... . The taxpayer in every instance has the burden of justifying the allowance of
any deduction claimed." 5

It is clear that ESSO, having assumed an expense properly attributable to its head office, cannot
now claim this as an ordinary and necessary expense paid or incurred in carrying on its own trade
or business.

WHEREFORE, the decision of the Court of Tax Appeals denying the petitioner's claims for refund
of P102,246.00 for 1959 and P434,234.92 for 1960, is AFFIRMED, with costs against the
petitioner.

SO ORDERED.
Narvasa (Chairman), Gancayco, Griño-Aquino and Medialdea, JJ., concur.

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Republic of the Philippines


SUPREME COURT
Manila
EN BANC

G.R. No. L-10448 August 30, 1957

IN THE MATTER OF A PETITION FOR DECLARATORY JUDGMENT REGARDING THE


VALIDITY OF MUNICIPAL ORDINANCE NO. 3659 OF THE CITY OF MANILA. PHYSICAL
THERAPY ORGANIZATION OF THE PHILIPPINES, INC., petitioner-appellant,
vs.
THE MUNICIPAL BOARD OF THE CITY OF MANILA and ARSENIO H. LACSON, as Mayor
of the City of Manila, respondents-appellees.

Mariano M. de Joya for appellant.


City Fiscal Eugenio Angeles and Assistant Fiscal Arsenio Nañawa for appellees.

MONTEMAYOR, J.:

The petitioner-appellant, an association of registered massagists and licensed operators of massage


clinics in the City of Manila and other parts of the country, filed an action in the Court of First
Instance of Manila for declaratory judgment regarding the validity of Municipal Ordinance No.
3659, promulgated by the Municipal Board and approved by the City Mayor. To stop the City
from enforcing said ordinance, the petitioner secured an injunction upon filing of a bond in the
sum of P1,000.00. A hearing was held, but the parties without introducing any evidence submitted
the case for decision on the pleadings, although they submitted written memoranda. Thereafter, the
trial court dismissed the petition and later dissolved the writ of injunction previously issued.

The petitioner appealed said order of dismissal directly to this Court. In support of its appeal,
petitioner-appellant contends among other things that the trial court erred in holding that the
Ordinance in question has not restricted the practice of massotherapy in massage clinics to
hygienic and aesthetic massage, that the Ordinance is valid as it does not regulate the practice of
massage, that the Municipal Board of Manila has the power to enact the Ordinance in question by
virtue of Section 18, Subsection (kk), Republic Act 409, and that permit fee of P100.00 is
moderate and not unreasonable. Inasmuch as the appellant assails and discuss certain provisions
regarding the ordinance in question, and it is necessary to pass upon the same, for purposes of
ready reference, we are reproducing said ordinance in toto.

ORDINANCE No. 3659

AN ORDINANCE REGULATING THE OPERATION OF MASSAGE CLINICS IN THE CITY


OF MANILA AND PROVIDING PENALTIES FOR VIOLATIONS THEREOF.

Be it ordained by the Municipal Board of the City of Manila, that:

Section 1. Definition. — For the purpose of this Ordinance the following words and phrases shall
be taken in the sense hereinbelow indicated:

(a) Massage clinic shall include any place or establishment used in the practice of hygienic and
aesthetic massage;

(b) Hygienic and aesthetic massage shall include any system of manipulation of treatment of the
superficial parts of the human body of hygienic and aesthetic purposes by rubbing, stroking,
kneading, or tapping with the hand or an instrument;

(c) Massagist shall include any person who shall have passed the required examination and shall
have been issued a massagist certificate by the Committee of Examiners of Massagist, or by the
Director of Health or his authorized representative;

(d) Attendant or helper shall include any person employed by a duly qualified massagist in any
message clinic to assist the latter in the practice of hygienic and aesthethic massage;

(e) Operator shall include the owner, manager, administrator, or any person who operates or is
responsible for the operation of a message clinic.

SEC. 2. Permit Fees. — No person shall engage in the operation of a massage clinic or in the
occupation of attendant or helper therein without first having obtained a permit therefor from the
Mayor. For every permit granted under the provisions of this Ordinance, there shall be paid to the
City Treasurer the following annual fees:

(a) Operator of a massage P100.00

(b) Attendant or helper 5.00

Said permit, which shall be renewed every year, may be revoked by the Mayor at any time for the
violation of this Ordinance.

SEC. 3. Building requirement. — (a) In each massage clinic, there shall be separate rooms for the
male and female customers. Rooms where massage operations are performed shall be provided
with sliding curtains only instead of swinging doors. The clinic shall be properly ventilated, well
lighted and maintained under sanitary conditions at all times while the establishment is open for
business and shall be provided with the necessary toilet and washing facilities.

(b) In every clinic there shall be no private rooms or separated compartment except those assigned
for toilet, lavatories, dressing room, office or kitchen.

(c) Every massage clinic shall "provided with only one entrance and it shall have no direct or
indirect communication whatsoever with any dwelling place, house or building.

SEC. 4. Regulations for the operation of massage clinics. — (a) It shall be unlawful for any
operator massagist, attendant or helper to use, or allow the use of, a massage clinic as a place of
assignation or permit the commission therein of any incident or immoral act. Massage clinics shall
be used only for hygienic and aesthetic massage.

(b) Massage clinics shall open at eight o'clock a.m. and shall close at eleven o'clock p.m.

(c) While engaged in the actual performance of their duties, massagists, attendants and helpers in a
massage clinic shall be as properly and sufficiently clad as to avoid suspicion of intent to commit
an indecent or immoral act;

(d) Attendants or helpers may render service to any individual customer only for hygienic and
aesthetic purposes under the order, direction, supervision, control and responsibility of a qualified
massagist.

SEC. 5. Qualifications — No person who has previously been convicted by final judgment of
competent court of any violation of the provisions of paragraphs 3 and 5 of Art. 202 and Arts. 335,
336, 340 and 342 of the Revised Penal Code, or Secs. 819 of the City of Manila, or who is
suffering from any venereal or communicable disease shall engage in the occupation of massagist,
attendant or helper in any massage clinic. Applicants for Mayor's permit shall attach to their
application a police clearance and health certificate duly issued by the City Health Officers as well
as a massagist certificate duly issued by the Committee or Examiners for Massagists or by the
Director of Health or his authorized representatives, in case of massagists.

SEC. 6. Duty of operator of massage clinic. — No operator of massage clinic shall allow such
clinic to operate without a duly qualified massagist nor allow, any man or woman to act as
massagist, attendant or helper therein without the Mayor's permit provided for in the preceding
sections. He shall submit whenever required by the Mayor or his authorized representative the
persons acting as massagists, attendants or helpers in his clinic. He shall place the massage clinic
open to inspection at all times by the police, health officers, and other law enforcement agencies
of the government, shall be held liable for anything which may happen with the premises of the
massage clinic.

SEC. 7. Penalty. — Any person violating any of the provisions of this Ordinance shall upon
conviction, be punished by a fine of not less than fifty pesos nor more than two hundred pesos or
by imprisonment for not less than six days nor more than six months, or both such fine and
imprisonment, at the discretion of the court.

SEC. 8. Repealing Clause. — All ordinances or parts of ordinances, which are inconsistent
herewith, are hereby repealed.

SEC. 9. Effectivity. — This Ordinance shall take effect upon its approval.

Enacted, August 27, 1954.


Approved, September 7, 1954.

The main contention of the appellant in its appeal and the principal ground of its petition for
declaratory judgment is that the City of Manila is without authority to regulate the operation of
massagists and the operation of massage clinics within its jurisdiction; that whereas under the Old
City Charter, particularly, Section 2444 (e) of the Revised Administrative Code, the Municipal
Board was expressly granted the power to regulate and fix the license fee for the occupation of
massagists, under the New Charter of Manila, Republic Act 409, said power has been withdrawn
or omitted and that now the Director of Health, pursuant to authority conferred by Section 938 of
the Revised Administrative Code and Executive Order No. 317, series of 1941, as amended by
Executive Order No. 392, series, 1951, is the one who exercises supervision over the practice of
massage and over massage clinics in the Philippines; that the Director of Health has issued
Administrative Order No. 10, dated May 5, 1953, prescribing "rules and regulations governing the
examination for admission to the practice of massage, and the operation of massage clinics,
offices, or establishments in the Philippines", which order was approved by the Secretary of
Health and duly published in the Official Gazette; that Section 1 (a) of Ordinance No. 3659 has
restricted the practice of massage to only hygienic and aesthetic massage prohibits or does not
allow qualified massagists to practice therapeutic massage in their massage clinics. Appellant also
contends that the license fee of P100.00 for operator in Section 2 of the Ordinance is
unreasonable, nay, unconscionable.

If we can ascertain the intention of the Manila Municipal Board in promulgating the Ordinance in
question, much of the objection of appellant to its legality may be solved. It would appear to us
that the purpose of the Ordinance is not to regulate the practice of massage, much less to restrict
the practice of licensed and qualified massagists of therapeutic massage in the Philippines. The
end sought to be attained in the Ordinance is to prevent the commission of immorality and the
practice of prostitution in an establishment masquerading as a massage clinic where the operators
thereof offer to massage or manipulate superficial parts of the bodies of customers for hygienic
and aesthetic purposes. This intention can readily be understood by the building requirements in
Section 3 of the Ordinance, requiring that there be separate rooms for male and female customers;
that instead of said rooms being separated by permanent partitions and swinging doors, there
should only be sliding curtains between them; that there should be "no private rooms or separated
compartments, except those assigned for toilet, lavatories, dressing room, office or kitchen"; that
every massage clinic should be provided with only one entrance and shall have no direct or
indirect communication whatsoever with any dwelling place, house or building; and that no
operator, massagists, attendant or helper will be allowed "to use or allow the use of a massage
clinic as a place of assignation or permit the commission therein of any immoral or incident act",
and in fixing the operating hours of such clinic between 8:00 a.m. and 11:00 p.m. This intention of
the Ordinance was correctly ascertained by Judge Hermogenes Concepcion, presiding in the trial
court, in his order of dismissal where he said: "What the Ordinance tries to avoid is that the
massage clinic run by an operator who may not be a masseur or massagista may be used as cover
for the running or maintaining a house of prostitution."

Ordinance No. 3659, particularly, Sections 1 to 4, should be considered as limited to massage


clinics used in the practice of hygienic and aesthetic massage. We do not believe that Municipal
Board of the City of Manila and the Mayor wanted or intended to regulate the practice of massage
in general or restrict the same to hygienic and aesthetic only.

As to the authority of the City Board to enact the Ordinance in question, the City Fiscal, in
representation of the appellees, calls our attention to Section 18 of the New Charter of the City of
Manila, Act No. 409, which gives legislative powers to the Municipal Board to enact all
ordinances it may deem necessary and proper for the promotion of the morality, peace, good order,
comfort, convenience and general welfare of the City and its inhabitants. This is generally referred
to as the General Welfare Clause, a delegation in statutory form of the police power, under which
municipal corporations, are authorized to enact ordinances to provide for the health and safety, and
promote the morality, peace and general welfare of its inhabitants. We agree with the City Fiscal.

As regards the permit fee of P100.00, it will be seen that said fee is made payable not by the
masseur or massagist, but by the operator of a massage clinic who may not be a massagist himself.
Compared to permit fees required in other operations, P100.00 may appear to be too large and
rather unreasonable. However, much discretion is given to municipal corporations in determining
the amount of said fee without considering it as a tax for revenue purposes:

The amount of the fee or charge is properly considered in determining whether it is a tax or an
exercise of the police power. The amount may be so large as to itself show that the purpose was to
raise revenue and not to regulate, but in regard to this matter there is a marked distinction between
license fees imposed upon useful and beneficial occupations which the sovereign wishes to
regulate but not restrict, and those which are inimical and dangerous to public health, morals or
safety. In the latter case the fee may be very large without necessarily being a tax. (Cooley on
Taxation, Vol. IV, pp. 3516-17; underlining supplied.)

Evidently, the Manila Municipal Board considered the practice of hygienic and aesthetic massage
not as a useful and beneficial occupation which will promote and is conducive to public morals,
and consequently, imposed the said permit fee for its regulation.

In conclusion, we find and hold that the Ordinance in question as we interpret it and as intended
by the appellees is valid. We deem it unnecessary to discuss and pass upon the other points raised
in the appeal. The order appealed from is hereby affirmed. No costs.

Paras, C.J., Bengzon, Padilla, Reyes, A., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L.,
Endencia and Felix, JJ., concur.

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Republic of the Philippines


SUPREME COURT
Manila

EN BANC

G.R. No. L-17725 February 28, 1962

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,


vs.
MAMBULAO LUMBER COMPANY, ET AL., defendants-appellants.

Office of the Solicitor General for plaintiff-appellee.


Arthur Tordesillas for defendants-appellants.

BARRERA, J.:
From the decision of the Court of First Instance of Manila (in Civil Case No. 34100) ordering it to
pay to plaintiff Republic of the Philippines the sum of P4,802.37 with 6% interest thereon from
the date of the filing of the complaint until fully paid, plus costs, defendant Mambulao Lumber
Company interposed the present appeal.1

The facts of the case are briefly stated in the decision of the trial court, to wit: .

The facts of this case are not contested and may be briefly summarized as follows: (a) under the
first cause of action, for forest charges covering the period from September 10, 1952 to May 24,
1953, defendants admitted that they have a liability of P587.37, which liability is covered by a
bond executed by defendant General Insurance & Surety Corporation for Mambulao Lumber
Company, jointly and severally in character, on July 29, 1953, in favor of herein plaintiff; (b)
under the second cause of action, both defendants admitted a joint and several liability in favor of
plaintiff in the sum of P296.70, also covered by a bond dated November 27, 1953; and (c) under
the third cause of action, both defendants admitted a joint and several liability in favor of plaintiff
for P3,928.30, also covered by a bond dated July 20, 1954. These three liabilities aggregate to
P4,802.37. If the liability of defendants in favor of plaintiff in the amount already mentioned is
admitted, then what is the defense interposed by the defendants? The defense presented by the
defendants is quite unusual in more ways than one. It appears from Exh. 3 that from July 31, 1948
to December 29, 1956, defendant Mambulao Lumber Company paid to the Republic of the
Philippines P8,200.52 for 'reforestation charges' and for the period commencing from April 30,
1947 to June 24, 1948, said defendant paid P927.08 to the Republic of the Philippines for
'reforestation charges'. These reforestation were paid to the plaintiff in pursuance of Section 1 of
Republic Act 115 which provides that there shall be collected, in addition to the regular forest
charges provided under Section 264 of Commonwealth Act 466 known as the National Internal
Revenue Code, the amount of P0.50 on each cubic meter of timber... cut out and removed from
any public forest for commercial purposes. The amount collected shall be expended by the director
of forestry, with the approval of the secretary of agriculture and commerce, for reforestation and
afforestation of watersheds, denuded areas ... and other public forest lands, which upon
investigation, are found needing reforestation or afforestation .... The total amount of the
reforestation charges paid by Mambulao Lumber Company is P9,127.50, and it is the contention
of the defendant Mambulao Lumber Company that since the Republic of the Philippines has not
made use of those reforestation charges collected from it for reforesting the denuded area of the
land covered by its license, the Republic of the Philippines should refund said amount, or, if it
cannot be refunded, at least it should be compensated with what Mambulao Lumber Company
owed the Republic of the Philippines for reforestation charges. In line with this thought, defendant
Mambulao Lumber Company wrote the director of forestry, on February 21, 1957 letter Exh. 1, in
paragraph 4 of which said defendant requested "that our account with your bureau be credited with
all the reforestation charges that you have imposed on us from July 1, 1947 to June 14, 1956,
amounting to around P2,988.62 ...". This letter of defendant Mambulao Lumber Company was
answered by the director of forestry on March 12, 1957, marked Exh. 2, in which the director of
forestry quoted an opinion of the secretary of justice, to the effect that he has no discretion to
extend the time for paying the reforestation charges and also explained why not all denuded areas
are being reforested.

The only issue to be resolved in this appeal is whether the sum of P9,127.50 paid by defendant-
appellant company to plaintiff-appellee as reforestation charges from 1947 to 1956 may be set off
or applied to the payment of the sum of P4,802.37 as forest charges due and owing from appellant
to appellee. It is appellant's contention that said sum of P9,127.50, not having been used in the
reforestation of the area covered by its license, the same is refundable to it or may be applied in
compensation of said sum of P4,802.37 due from it as forest charges.1äwphï1.ñët

We find appellant's claim devoid of any merit. Section 1 of Republic Act No. 115, provides:

SECTION 1. There shall be collected, in addition to the regular forest charges provided for under
Section two hundred and sixty-four of Commonwealth Act Numbered Four Hundred Sixty-six,
known as the National Internal Revenue Code, the amount of fifty centavos on each cubic meter
of timber for the first and second groups and forty centavos for the third and fourth groups cut out
and removed from any public forest for commercial purposes. The amount collected shall be
expended by the Director of Forestry, with the approval of the Secretary of Agriculture and
Natural Resources (commerce), for reforestation and afforestation of watersheds, denuded areas
and cogon and open lands within forest reserves, communal forest, national parks, timber lands,
sand dunes, and other public forest lands, which upon investigation, are found needing
reforestation or afforestation, or needing to be under forest cover for the growing of economic
trees for timber, tanning, oils, gums, and other minor forest products or medicinal plants, or for
watersheds protection, or for prevention of erosion and floods and preparation of necessary plans
and estimate of costs and for reconnaisance survey of public forest lands and for such other
expenses as may be deemed necessary for the proper carrying out of the purposes of this Act.

All revenues collected by virtue of, and pursuant to, the provisions of the preceding paragraph and
from the sale of barks, medical plants and other products derived from plantations as herein
provided shall constitute a fund to be known as Reforestation Fund, to be expended exclusively in
carrying out the purposes provided for under this Act. All provincial or city treasurers and their
deputies shall act as agents of the Director of Forestry for the collection of the revenues or
incomes derived from the provisions of this Act. (Emphasis supplied.)

Under this provision, it seems quite clear that the amount collected as reforestation charges from a
timber licenses or concessionaire shall constitute a fund to be known as the Reforestation Fund,
and that the same shall be expended by the Director of Forestry, with the approval of the Secretary
of Agriculture and Natural Resources for the reforestation or afforestation, among others, of
denuded areas which, upon investigation, are found to be needing reforestation or afforestation.
Note that there is nothing in the law which requires that the amount collected as reforestation
charges should be used exclusively for the reforestation of the area covered by the license of a
licensee or concessionaire, and that if not so used, the same should be refunded to him. Observe
too, that the licensee's area may or may not be reforested at all, depending on whether the
investigation thereof by the Director of Forestry shows that said area needs reforestation. The
conclusion seems to be that the amount paid by a licensee as reforestation charges is in the nature
of a tax which forms a part of the Reforestation Fund, payable by him irrespective of whether the
area covered by his license is reforested or not. Said fund, as the law expressly provides, shall be
expended in carrying out the purposes provided for thereunder, namely, the reforestation or
afforestation, among others, of denuded areas needing reforestation or afforestation.

Appellant maintains that the principle of a compensation in Article 1278 of the new Civil Code2 is
applicable, such that the sum of P9,127.50 paid by it as reforestation charges may compensate its
indebtedness to appellee in the sum of P4,802.37 as forest charges. But in the view we take of this
case, appellant and appellee are not mutually creditors and debtors of each other. Consequently,
the law on compensation is inapplicable. On this point, the trial court correctly observed: .

Under Article 1278, NCC, compensation should take place when two persons in their own right
are creditors and debtors of each other. With respect to the forest charges which the defendant
Mambulao Lumber Company has paid to the government, they are in the coffers of the
government as taxes collected, and the government does not owe anything, crystal clear that the
Republic of the Philippines and the Mambulao Lumber Company are not creditors and debtors of
each other, because compensation refers to mutual debts. ..

And the weight of authority is to the effect that internal revenue taxes, such as the forest charges in
question, can be the subject of set-off or compensation.

A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under
the statutes of set-off, which are construed uniformly, in the light of public policy, to exclude the
remedy in an action or any indebtedness of the state or municipality to one who is liable to the
state or municipality for taxes. Neither are they a proper subject of recoupment since they do not
arise out of the contract or transaction sued on. ... (80 C.J.S. 73-74. ) .

The general rule, based on grounds of public policy is well-settled that no set-off is admissible
against demands for taxes levied for general or local governmental purposes. The reason on which
the general rule is based, is that taxes are not in the nature of contracts between the party and party
but grow out of a duty to, and are the positive acts of the government, to the making and enforcing
of which, the personal consent of individual taxpayers is not required. ... If the taxpayer can
properly refuse to pay his tax when called upon by the Collector, because he has a claim against
the governmental body which is not included in the tax levy, it is plain that some legitimate and
necessary expenditure must be curtailed. If the taxpayer's claim is disputed, the collection of the
tax must await and abide the result of a lawsuit, and meanwhile the financial affairs of the
government will be thrown into great confusion. (47 Am. Jur. 766-767.)

WHEREFORE, the judgment of the trial court appealed from is hereby affirmed in all respects,
with costs against the defendant-appellant. So ordered.

Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Paredes, Dizon and
De Leon, JJ., concur.
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Republic of the Philippines


SUPREME COURT
Manila

THIRD DIVISION

G.R. No. L-67649 June 28, 1988

ENGRACIO FRANCIA, petitioner,


vs.
INTERMEDIATE APPELLATE COURT and HO FERNANDEZ, respondents.

GUTIERREZ, JR., J.:

The petitioner invokes legal and equitable grounds to reverse the questioned decision of the
Intermediate Appellate Court, to set aside the auction sale of his property which took place on
December 5, 1977, and to allow him to recover a 203 square meter lot which was, sold at public
auction to Ho Fernandez and ordered titled in the latter's name.

The antecedent facts are as follows:

Engracio Francia is the registered owner of a residential lot and a two-story house built upon it
situated at Barrio San Isidro, now District of Sta. Clara, Pasay City, Metro Manila. The lot, with an
area of about 328 square meters, is described and covered by Transfer Certificate of Title No. 4739
(37795) of the Registry of Deeds of Pasay City.

On October 15, 1977, a 125 square meter portion of Francia's property was expropriated by the
Republic of the Philippines for the sum of P4,116.00 representing the estimated amount equivalent
to the assessed value of the aforesaid portion.
Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on December 5,
1977, his property was sold at public auction by the City Treasurer of Pasay City pursuant to
Section 73 of Presidential Decree No. 464 known as the Real Property Tax Code in order to satisfy
a tax delinquency of P2,400.00. Ho Fernandez was the highest bidder for the property.

Francia was not present during the auction sale since he was in Iligan City at that time helping his
uncle ship bananas.

On March 3, 1979, Francia received a notice of hearing of LRC Case No. 1593-P "In re: Petition
for Entry of New Certificate of Title" filed by Ho Fernandez, seeking the cancellation of TCT No.
4739 (37795) and the issuance in his name of a new certificate of title. Upon verification through
his lawyer, Francia discovered that a Final Bill of Sale had been issued in favor of Ho Fernandez
by the City Treasurer on December 11, 1978. The auction sale and the final bill of sale were both
annotated at the back of TCT No. 4739 (37795) by the Register of Deeds.

On March 20, 1979, Francia filed a complaint to annul the auction sale. He later amended his
complaint on January 24, 1980.

On April 23, 1981, the lower court rendered a decision, the dispositive portion of which reads:

WHEREFORE, in view of the foregoing, judgment is hereby rendered dismissing the amended
complaint and ordering:

(a) The Register of Deeds of Pasay City to issue a new Transfer Certificate of Title in favor of
the defendant Ho Fernandez over the parcel of land including the improvements thereon, subject
to whatever encumbrances appearing at the back of TCT No. 4739 (37795) and ordering the same
TCT No. 4739 (37795) cancelled.

(b) The plaintiff to pay defendant Ho Fernandez the sum of P1,000.00 as attorney's fees. (p. 30,
Record on Appeal)

The Intermediate Appellate Court affirmed the decision of the lower court in toto.

Hence, this petition for review.

Francia prefaced his arguments with the following assignments of grave errors of law:

RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE ERROR OF


LAW IN NOT HOLDING PETITIONER'S OBLIGATION TO PAY P2,400.00 FOR SUPPOSED
TAX DELINQUENCY WAS SET-OFF BY THE AMOUNT OF P4,116.00 WHICH THE
GOVERNMENT IS INDEBTED TO THE FORMER.
II

RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE AND


SERIOUS ERROR IN NOT HOLDING THAT PETITIONER WAS NOT PROPERLY AND
DULY NOTIFIED THAT AN AUCTION SALE OF HIS PROPERTY WAS TO TAKE PLACE
ON DECEMBER 5, 1977 TO SATISFY AN ALLEGED TAX DELINQUENCY OF P2,400.00.

III

RESPONDENT INTERMEDIATE APPELLATE COURT FURTHER COMMITTED A


SERIOUS ERROR AND GRAVE ABUSE OF DISCRETION IN NOT HOLDING THAT THE
PRICE OF P2,400.00 PAID BY RESPONTDENT HO FERNANDEZ WAS GROSSLY
INADEQUATE AS TO SHOCK ONE'S CONSCIENCE AMOUNTING TO FRAUD AND A
DEPRIVATION OF PROPERTY WITHOUT DUE PROCESS OF LAW, AND
CONSEQUENTLY, THE AUCTION SALE MADE THEREOF IS VOID. (pp. 10, 17, 20-21,
Rollo)

We gave due course to the petition for a more thorough inquiry into the petitioner's allegations that
his property was sold at public auction without notice to him and that the price paid for the
property was shockingly inadequate, amounting to fraud and deprivation without due process of
law.

A careful review of the case, however, discloses that Mr. Francia brought the problems raised in
his petition upon himself. While we commiserate with him at the loss of his property, the law and
the facts militate against the grant of his petition. We are constrained to dismiss it.

Francia contends that his tax delinquency of P2,400.00 has been extinguished by legal
compensation. He claims that the government owed him P4,116.00 when a portion of his land was
expropriated on October 15, 1977. Hence, his tax obligation had been set-off by operation of law
as of October 15, 1977.

There is no legal basis for the contention. By legal compensation, obligations of persons, who in
their own right are reciprocally debtors and creditors of each other, are extinguished (Art. 1278,
Civil Code). The circumstances of the case do not satisfy the requirements provided by Article
1279, to wit:

(1) that each one of the obligors be bound principally and that he be at the same time a principal
creditor of the other;

xxx xxx xxx

(3) that the two debts be due.

xxx xxx xxx


This principal contention of the petitioner has no merit. We have consistently ruled that there can
be no off-setting of taxes against the claims that the taxpayer may have against the government. A
person cannot refuse to pay a tax on the ground that the government owes him an amount equal to
or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit
against the government.

In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court ruled that Internal
Revenue Taxes can not be the subject of set-off or compensation. We stated that:

A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under
the statutes of set-off, which are construed uniformly, in the light of public policy, to exclude the
remedy in an action or any indebtedness of the state or municipality to one who is liable to the
state or municipality for taxes. Neither are they a proper subject of recoupment since they do not
arise out of the contract or transaction sued on. ... (80 C.J.S., 7374). "The general rule based on
grounds of public policy is well-settled that no set-off admissible against demands for taxes levied
for general or local governmental purposes. The reason on which the general rule is based, is that
taxes are not in the nature of contracts between the party and party but grow out of duty to, and are
the positive acts of the government to the making and enforcing of which, the personal consent of
individual taxpayers is not required. ..."

We stated that a taxpayer cannot refuse to pay his tax when called upon by the collector because
he has a claim against the governmental body not included in the tax levy.

This rule was reiterated in the case of Corders v. Gonda (18 SCRA 331) where we stated that: "...
internal revenue taxes can not be the subject of compensation: Reason: government and taxpayer
are not mutually creditors and debtors of each other' under Article 1278 of the Civil Code and a
"claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off."

There are other factors which compel us to rule against the petitioner. The tax was due to the city
government while the expropriation was effected by the national government. Moreover, the
amount of P4,116.00 paid by the national government for the 125 square meter portion of his lot
was deposited with the Philippine National Bank long before the sale at public auction of his
remaining property. Notice of the deposit dated September 28, 1977 was received by the petitioner
on September 30, 1977. The petitioner admitted in his testimony that he knew about the P4,116.00
deposited with the bank but he did not withdraw it. It would have been an easy matter to withdraw
P2,400.00 from the deposit so that he could pay the tax obligation thus aborting the sale at public
auction.

Petitioner had one year within which to redeem his property although, as well be shown later, he
claimed that he pocketed the notice of the auction sale without reading it.

Petitioner contends that "the auction sale in question was made without complying with the
mandatory provisions of the statute governing tax sale. No evidence, oral or otherwise, was
presented that the procedure outlined by law on sales of property for tax delinquency was
followed. ... Since defendant Ho Fernandez has the affirmative of this issue, the burden of proof
therefore rests upon him to show that plaintiff was duly and properly notified ... .(Petition for
Review, Rollo p. 18; emphasis supplied)

We agree with the petitioner's claim that Ho Fernandez, the purchaser at the auction sale, has the
burden of proof to show that there was compliance with all the prescribed requisites for a tax sale.

The case of Valencia v. Jimenez (11 Phil. 492) laid down the doctrine that:

xxx xxx xxx

... [D]ue process of law to be followed in tax proceedings must be established by proof and the
general rule is that the purchaser of a tax title is bound to take upon himself the burden of showing
the regularity of all proceedings leading up to the sale. (emphasis supplied)

There is no presumption of the regularity of any administrative action which results in depriving a
taxpayer of his property through a tax sale. (Camo v. Riosa Boyco, 29 Phil. 437); Denoga v.
Insular Government, 19 Phil. 261). This is actually an exception to the rule that administrative
proceedings are presumed to be regular.

But even if the burden of proof lies with the purchaser to show that all legal prerequisites have
been complied with, the petitioner can not, however, deny that he did receive the notice for the
auction sale. The records sustain the lower court's finding that:

[T]he plaintiff claimed that it was illegal and irregular. He insisted that he was not properly
notified of the auction sale. Surprisingly, however, he admitted in his testimony that he received
the letter dated November 21, 1977 (Exhibit "I") as shown by his signature (Exhibit "I-A")
thereof. He claimed further that he was not present on December 5, 1977 the date of the auction
sale because he went to Iligan City. As long as there was substantial compliance with the
requirements of the notice, the validity of the auction sale can not be assailed ... .

We quote the following testimony of the petitioner on cross-examination, to wit:

Q. My question to you is this letter marked as Exhibit I for Ho Fernandez notified you that the
property in question shall be sold at public auction to the highest bidder on December 5, 1977
pursuant to Sec. 74 of PD 464. Will you tell the Court whether you received the original of this
letter?

A. I just signed it because I was not able to read the same. It was just sent by mail carrier.

Q. So you admit that you received the original of Exhibit I and you signed upon receipt thereof
but you did not read the contents of it?
A. Yes, sir, as I was in a hurry.

Q. After you received that original where did you place it?

A. I placed it in the usual place where I place my mails.

Petitioner, therefore, was notified about the auction sale. It was negligence on his part when he
ignored such notice. By his very own admission that he received the notice, his now coming to
court assailing the validity of the auction sale loses its force.

Petitioner's third assignment of grave error likewise lacks merit. As a general rule, gross
inadequacy of price is not material (De Leon v. Salvador, 36 SCRA 567; Ponce de Leon v.
Rehabilitation Finance Corporation, 36 SCRA 289; Tolentino v. Agcaoili, 91 Phil. 917 Unrep.).
See also Barrozo Vda. de Gordon v. Court of Appeals (109 SCRA 388) we held that "alleged gross
inadequacy of price is not material when the law gives the owner the right to redeem as when a
sale is made at public auction, upon the theory that the lesser the price, the easier it is for the
owner to effect redemption." In Velasquez v. Coronel (5 SCRA 985), this Court held:

... [R]espondent treasurer now claims that the prices for which the lands were sold are
unconscionable considering the wide divergence between their assessed values and the amounts
for which they had been actually sold. However, while in ordinary sales for reasons of equity a
transaction may be invalidated on the ground of inadequacy of price, or when such inadequacy
shocks one's conscience as to justify the courts to interfere, such does not follow when the law
gives to the owner the right to redeem, as when a sale is made at public auction, upon the theory
that the lesser the price the easier it is for the owner to effect the redemption. And so it was aptly
said: "When there is the right to redeem, inadequacy of price should not be material, because the
judgment debtor may reacquire the property or also sell his right to redeem and thus recover the
loss he claims to have suffered by reason of the price obtained at the auction sale."

The reason behind the above rulings is well enunciated in the case of Hilton et. ux. v. De Long, et
al. (188 Wash. 162, 61 P. 2d, 1290):

If mere inadequacy of price is held to be a valid objection to a sale for taxes, the collection of
taxes in this manner would be greatly embarrassed, if not rendered altogether impracticable. In
Black on Tax Titles (2nd Ed.) 238, the correct rule is stated as follows: "where land is sold for
taxes, the inadequacy of the price given is not a valid objection to the sale." This rule arises from
necessity, for, if a fair price for the land were essential to the sale, it would be useless to offer the
property. Indeed, it is notorious that the prices habitually paid by purchasers at tax sales are
grossly out of proportion to the value of the land. (Rothchild Bros. v. Rollinger, 32 Wash. 307, 73
P. 367, 369).

In this case now before us, we can aptly use the language of McGuire, et al. v. Bean, et al. (267 P.
555):
Like most cases of this character there is here a certain element of hardship from which we would
be glad to relieve, but do so would unsettle long-established rules and lead to uncertainty and
difficulty in the collection of taxes which are the life blood of the state. We are convinced that the
present rules are just, and that they bring hardship only to those who have invited it by their own
neglect.

We are inclined to believe the petitioner's claim that the value of the lot has greatly appreciated in
value. Precisely because of the widening of Buendia Avenue in Pasay City, which necessitated the
expropriation of adjoining areas, real estate values have gone up in the area. However, the price
quoted by the petitioner for a 203 square meter lot appears quite exaggerated. At any rate, the
foregoing reasons which answer the petitioner's claims lead us to deny the petition.

And finally, even if we are inclined to give relief to the petitioner on equitable grounds, there are
no strong considerations of substantial justice in his favor. Mr. Francia failed to pay his taxes for
14 years from 1963 up to the date of the auction sale. He claims to have pocketed the notice of
sale without reading it which, if true, is still an act of inexplicable negligence. He did not
withdraw from the expropriation payment deposited with the Philippine National Bank an amount
sufficient to pay for the back taxes. The petitioner did not pay attention to another notice sent by
the City Treasurer on November 3, 1978, during the period of redemption, regarding his tax
delinquency. There is furthermore no showing of bad faith or collusion in the purchase of the
property by Mr. Fernandez. The petitioner has no standing to invoke equity in his attempt to regain
the property by belatedly asking for the annulment of the sale.

WHEREFORE, IN VIEW OF THE FOREGOING, the petition for review is DISMISSED. The
decision of the respondent court is affirmed.

SO ORDERED.

Fernan (Chairman), Feliciano, Bidin and Cortes, JJ., concur.

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Republic of the Philippines


SUPREME COURT
Manila

EN BANC

G.R. No. L-18994 June 29, 1963

MELECIO R. DOMINGO, as Commissioner of Internal Revenue, petitioner,


vs.
HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of First Instance of Leyte,
and SIMEONA K. PRICE, as Administratrix of the Intestate Estate of the late Walter Scott Price,
respondents.

Office of the Solicitor General and Atty. G. H. Mantolino for petitioner.


Benedicto and Martinez for respondents.

LABRADOR, J.:

This is a petition for certiorari and mandamus against the Judge of the Court of First Instance of
Leyte, Ron. Lorenzo C. Garlitos, presiding, seeking to annul certain orders of the court and for an
order in this Court directing the respondent court below to execute the judgment in favor of the
Government against the estate of Walter Scott Price for internal revenue taxes.

It appears that in Melecio R. Domingo vs. Hon. Judge S. C. Moscoso, G.R. No. L-14674, January
30, 1960, this Court declared as final and executory the order for the payment by the estate of the
estate and inheritance taxes, charges and penalties, amounting to P40,058.55, issued by the Court
of First Instance of Leyte in, special proceedings No. 14 entitled "In the matter of the Intestate
Estate of the Late Walter Scott Price." In order to enforce the claims against the estate the fiscal
presented a petition dated June 21, 1961, to the court below for the execution of the judgment. The
petition was, however, denied by the court which held that the execution is not justifiable as the
Government is indebted to the estate under administration in the amount of P262,200. The orders
of the court below dated August 20, 1960 and September 28, 1960, respectively, are as follows:

Atty. Benedicto submitted a copy of the contract between Mrs. Simeona K. Price, Administratrix
of the estate of her late husband Walter Scott Price and Director Zoilo Castrillo of the Bureau of
Lands dated September 19, 1956 and acknowledged before Notary Public Salvador V. Esguerra,
legal adviser in Malacañang to Executive Secretary De Leon dated December 14, 1956, the note
of His Excellency, Pres. Carlos P. Garcia, to Director Castrillo dated August 2, 1958, directing the
latter to pay to Mrs. Price the sum ofP368,140.00, and an extract of page 765 of Republic Act No.
2700 appropriating the sum of P262.200.00 for the payment to the Leyte Cadastral Survey, Inc.,
represented by the administratrix Simeona K. Price, as directed in the above note of the President.
Considering these facts, the Court orders that the payment of inheritance taxes in the sum of
P40,058.55 due the Collector of Internal Revenue as ordered paid by this Court on July 5, 1960 in
accordance with the order of the Supreme Court promulgated July 30, 1960 in G.R. No. L-14674,
be deducted from the amount of P262,200.00 due and payable to the Administratrix Simeona K.
Price, in this estate, the balance to be paid by the Government to her without further delay. (Order
of August 20, 1960)

The Court has nothing further to add to its order dated August 20, 1960 and it orders that the
payment of the claim of the Collector of Internal Revenue be deferred until the Government shall
have paid its accounts to the administratrix herein amounting to P262,200.00. It may not be amiss
to repeat that it is only fair for the Government, as a debtor, to its accounts to its citizens-creditors
before it can insist in the prompt payment of the latter's account to it, specially taking into
consideration that the amount due to the Government draws interests while the credit due to the
present state does not accrue any interest. (Order of September 28, 1960)

The petition to set aside the above orders of the court below and for the execution of the claim of
the Government against the estate must be denied for lack of merit. The ordinary procedure by
which to settle claims of indebtedness against the estate of a deceased person, as an inheritance
tax, is for the claimant to present a claim before the probate court so that said court may order the
administrator to pay the amount thereof. To such effect is the decision of this Court in Aldamiz vs.
Judge of the Court of First Instance of Mindoro, G.R. No. L-2360, Dec. 29, 1949, thus:

. . . a writ of execution is not the proper procedure allowed by the Rules of Court for the payment
of debts and expenses of administration. The proper procedure is for the court to order the sale of
personal estate or the sale or mortgage of real property of the deceased and all debts or expenses
of administrator and with the written notice to all the heirs legatees and devisees residing in the
Philippines, according to Rule 89, section 3, and Rule 90, section 2. And when sale or mortgage of
real estate is to be made, the regulations contained in Rule 90, section 7, should be complied
with.1äwphï1.ñët

Execution may issue only where the devisees, legatees or heirs have entered into possession of
their respective portions in the estate prior to settlement and payment of the debts and expenses of
administration and it is later ascertained that there are such debts and expenses to be paid, in
which case "the court having jurisdiction of the estate may, by order for that purpose, after
hearing, settle the amount of their several liabilities, and order how much and in what manner each
person shall contribute, and may issue execution if circumstances require" (Rule 89, section 6; see
also Rule 74, Section 4; Emphasis supplied.) And this is not the instant case.

The legal basis for such a procedure is the fact that in the testate or intestate proceedings to settle
the estate of a deceased person, the properties belonging to the estate are under the jurisdiction of
the court and such jurisdiction continues until said properties have been distributed among the
heirs entitled thereto. During the pendency of the proceedings all the estate is in custodia legis and
the proper procedure is not to allow the sheriff, in case of the court judgment, to seize the
properties but to ask the court for an order to require the administrator to pay the amount due from
the estate and required to be paid.

Another ground for denying the petition of the provincial fiscal is the fact that the court having
jurisdiction of the estate had found that the claim of the estate against the Government has been
recognized and an amount of P262,200 has already been appropriated for the purpose by a
corresponding law (Rep. Act No. 2700). Under the above circumstances, both the claim of the
Government for inheritance taxes and the claim of the intestate for services rendered have already
become overdue and demandable is well as fully liquidated. Compensation, therefore, takes place
by operation of law, in accordance with the provisions of Articles 1279 and 1290 of the Civil
Code, and both debts are extinguished to the concurrent amount, thus:

ART. 1200. When all the requisites mentioned in article 1279 are present, compensation takes
effect by operation of law, and extinguished both debts to the concurrent amount, eventhough the
creditors and debtors are not aware of the compensation.

It is clear, therefore, that the petitioner has no clear right to execute the judgment for taxes against
the estate of the deceased Walter Scott Price. Furthermore, the petition for certiorari and
mandamus is not the proper remedy for the petitioner. Appeal is the remedy.

The petition is, therefore, dismissed, without costs.

Padilla, Bautista Angelo, Concepcion, Barrera, Paredes, Dizon, Regala and Makalintal, JJ., concur.
Bengzon, C.J., took no part.

The Lawphil Project - Arellano Law Foundation

EN BANC
[G.R. No. 117359. July 23, 1998]

DAVAO GULF LUMBER CORPORATION, petitioner, vs. COMMISSIONER OF INTERNAL


REVENUE and COURT OF APPEALS, respondents.
DECISION
PANGANIBAN, J.:

Because taxes are the lifeblood of the nation, statutes that allow exemptions are construed strictly
against the grantee and liberally in favor of the government. Otherwise stated, any exemption from
the payment of a tax must be clearly stated in the language of the law; it cannot be merely implied
therefrom.

Statement of the Case

This principium is applied by the Court in resolving this petition for review under Rule 45 of the
Rules of Court, assailing the Decision[1] of Respondent Court of Appeals[2] in CA-GR SP No.
34581 dated September 26, 1994, which affirmed the June 21, 1994 Decision[3] of the Court of
Tax Appeals[4] in CTA Case No. 3574. The dispositive portion of the CTA Decision affirmed by
Respondent Court reads:

WHEREFORE, judgment is hereby rendered ordering the respondent to refund to the petitioner
the amount of P2,923.15 representing the partial refund of specific taxes paid on manufactured
oils and fuels.[5]

The Antecedent Facts

The facts are undisputed.[6] Petitioner is a licensed forest concessionaire possessing a Timber
License Agreement granted by the Ministry of Natural Resources (now Department of
Environment and Natural Resources). From July 1, 1980 to January 31, 1982 petitioner purchased,
from various oil companies, refined and manufactured mineral oils as well as motor and diesel
fuels, which it used exclusively for the exploitation and operation of its forest concession. Said oil
companies paid the specific taxes imposed, under Sections 153 and 156[7] of the 1977 National
Internal Revenue Code (NIRC), on the sale of said products. Being included in the purchase price
of the oil products, the specific taxes paid by the oil companies were eventually passed on to the
user, the petitioner in this case.

On December 13, 1982, petitioner filed before Respondent Commissioner of Internal Revenue
(CIR) a claim for refund in the amount of P120,825.11, representing 25% of the specific taxes
actually paid on the above-mentioned fuels and oils that were used by petitioner in its operations
as forest concessionaire. The claim was based on Insular Lumber Co. vs. Court of Tax Appeals[8]
and Section 5 of RA 1435 which reads:

Section 5. The proceeds of the additional tax on manufactured oils shall accrue to the road and
bridge funds of the political subdivision for whose benefit the tax is collected: Provided, however,
That whenever any oils mentioned above are used by miners or forest concessionaires in their
operations, twenty-five per centum of the specific tax paid thereon shall be refunded by the
Collector of Internal Revenue upon submission of proof of actual use of oils and under similar
conditions enumerated in subparagraphs one and two of section one hereof, amending section one
hundred forty-two of the Internal Revenue Code: Provided, further, That no new road shall be
constructed unless the routes or location thereof shall have been approved by the Commissioner of
Public Highways after a determination that such road can be made part of an integral and
articulated route in the Philippine Highway System, as required in section twenty-six of the
Philippine Highway Act of 1953.

It is an unquestioned fact that petitioner complied with the procedure for refund, including the
submission of proof of the actual use of the aforementioned oils in its forest concession as
required by the above-quoted law. Petitioner, in support of its claim for refund, submitted to the
CIR the affidavits of its general manager, the president of the Philippine Wood Products
Association, and three disinterested persons, all attesting that the said manufactured diesel and
fuel oils were actually used in the exploitation and operation of its forest concession.

On January 20, 1983, petitioner filed at the CTA a petition for review docketed as CTA Case No.
3574. On June 21, 1994, the CTA rendered its decision finding petitioner entitled to a partial
refund of specific taxes the latter had paid in the reduced amount of P2,923.15. The CTA ruled
that the claim on purchases of lubricating oil (from July 1, 1980 to January 19, 1981), and on
manufactured oils other than lubricating oils (from July 1, 1980 to January 4, 1981) had
prescribed. Disallowed on the ground that they were not included in the original claim filed before
the CIR were the claims for refund on purchases of manufactured oils from January 1, 1980 to
June 30, 1980 and from February 1, 1982 to June 30, 1982. In regard to the other purchases, the
CTA granted the claim, but it computed the refund based on rates deemed paid under RA 1435,
and not on the higher rates actually paid by petitioner under the NIRC.

Insisting that the basis for computing the refund should be the increased rates prescribed by
Sections 153 and 156 of the NIRC, petitioner elevated the matter to the Court of Appeals. As
noted earlier, the Court of Appeals affirmed the CTA Decision. Hence, this petition for review.[9]

Public Respondents Ruling

In its petition before the Court of Appeals, petitioner raised the following arguments:

I. The respondent Court of Tax Appeals failed to apply the Supreme Courts Decision in Insular
Lumber Co. v. Court of Tax Appeals which granted the claim for partial refund of specific taxes
paid by the claimant, without qualification or limitation.

II. The respondent Court of Tax Appeals ignored the increase in rates imposed by succeeding
amendatory laws, under which the petitioner paid the specific taxes on manufactured and diesel
fuels.

III. In its decision, the respondent Court of Tax Appeals ruled contrary to established tenets of law
when it lent itself to interpreting Section 5 of R.A. 1435, when the construction of said law is not
necessary.

IV. Sections 1 and 2 of R.A. 1435 are not the operative provisions to be applied but rather,
Sections 153 and 156 of the National Internal Revenue Code, as amended.

V. To rule that the basis for computation of the refunded taxes should be Sections 1 and 2 of R.A.
1435 rather than Section 153 and 156 of the National Internal Revenue Code is unfair, erroneous,
arbitrary, inequitable and oppressive.[10]

The Court of Appeals held that the claim for refund should indeed be computed on the basis of the
amounts deemed paid under Sections 1 and 2 of RA 1435. In so ruling, it cited our pronouncement
in Commissioner of Internal Revenue v. Rio Tuba Nickel Mining Corporation[11] and our
subsequent Resolution dated June 15, 1992 clarifying the said Decision. Respondent Court further
ruled that the claims for refund which prescribed and those which were not filed at the
administrative level must be excluded.
The Issue

In its Memorandum, petitioner raises one critical issue:

Whether or not petitioner is entitled under Republic Act No. 1435 to the refund of 25% of the
amount of specific taxes it actually paid on various refined and manufactured mineral oils and
other oil products taxed under Sec. 153 and Sec. 156 of the 1977 (Sec. 142 and Sec. 145 of the
1939) National Internal Revenue Code.[12]

In the main, the question before us pertains only to the computation of the tax refund. Petitioner
argues that the refund should be based on the increased rates of specific taxes which it actually
paid, as prescribed in Sections 153 and 156 of the NIRC. Public respondent, on the other hand,
contends that it should be based on specific taxes deemed paid under Sections 1 and 2 of RA 1435.

The Courts Ruling

The petition is not meritorious.

Petitioner Entitled to Refund


Under Sec. 5 of RA 1435

At the outset, it must be stressed that petitioner is entitled to a partial refund under Section 5 of RA
1435, which was enacted to provide means for increasing the Highway Special Fund.

The rationale for this grant of partial refund of specific taxes paid on purchases of manufactured
diesel and fuel oils rests on the character of the Highway Special Fund. The specific taxes
collected on gasoline and fuel accrue to the Fund, which is to be used for the construction and
maintenance of the highway system. But because the gasoline and fuel purchased by mining and
lumber concessionaires are used within their own compounds and roads, and their vehicles seldom
use the national highways, they do not directly benefit from the Fund and its use. Hence, the tax
refund gives the mining and the logging companies a measure of relief in light of their peculiar
situation.[13] When the Highway Special Fund was abolished in 1985, the reason for the refund
likewise ceased to exist.[14] Since petitioner purchased the subject manufactured diesel and fuel
oils from July 1, 1980 to January 31, 1982 and submitted the required proof that these were
actually used in operating its forest concession, it is entitled to claim the refund under Section 5 of
RA 1435.

Tax Refund Strictly Construed


Against the Grantee

Petitioner submits that it is entitled to the refund of 25 percent of the specific taxes it had actually
paid for the petroleum products used in its operations. In other words, it claims a refund based on
the increased rates under Sections 153 and 156 of the NIRC.[15] Petitioner argues that the
statutory grant of the refund privilege, specifically the phrase twenty-five per centum of the
specific tax paid thereon shall be refunded by the Collector of Internal Revenue, is clear and
unambiguous enough to require construction or qualification thereof.[16] In addition, it cites our
pronouncement in Insular Lumber vs. Court of Tax Appeals:[17]

x x x Section 5 [of RA 1435] makes reference to subparagraphs 1 and 2 of Section 1 only for the
purpose of prescribing the procedure for refund. This express reference cannot be expanded in
scope to include the limitation of the period of refund. If the limitation of the period of refund of
specific taxes paid on oils used in aviation and agriculture is intended to cover similar taxes paid
on oil used by miners and forest concessionaires, there would have been no need of dealing with
oil used by miners and forest concessions separately and Section 5 would very well have been
included in Section 1 of Republic Act No. 1435, notwithstanding the different rate of exemption.

Petitioner then reasons that the express mention of Section 1 of RA 1435 in Section 5 cannot be
expanded to include a limitation on the tax rates to be applied x x x [otherwise,] Section 5 should
very well have been included in Section 1 x x x.[18]

The Court is not persuaded. The relevant statutory provisions do not clearly support petitioners
claim for refund. RA 1435 provides:

SECTION 1. Section one hundred and forty-two of the National Internal Revenue Code, as
amended, is further amended to read as follows:

SEC. 142. Specific tax on manufactured oils and other fuels. -- On refined and manufactured
mineral oils and motor fuels, there shall be collected the following taxes:

(a) Kerosene or petroleum, per liter of volume capacity, two and one-half centavos;

(b) Lubricating oils, per liter of volume capacity, seven centavos;

(c) Naptha, gasoline, and all other similar products of distillation, per liter of volume capacity,
eight centavos; and

(d) On denatured alcohol to be used for motive power, per liter of volume capacity, one centavo:
Provided, That if the denatured alcohol is mixed with gasoline, the specific tax on which has
already been paid, only the alcohol content shall be subject to the tax herein prescribed. For the
purpose of this subsection, the removal of denatured alcohol of not less than one hundred eighty
degrees proof (ninety per centum absolute alcohol) shall be deemed to have been removed for
motive power, unless shown to the contrary.

Whenever any of the oils mentioned above are, during the five years from June eighteen, nineteen
hundred and fifty two, used in agriculture and aviation, fifty per centum of the specific tax paid
thereon shall be refunded by the Collector of Internal Revenue upon the submission of the
following:
(1) A sworn affidavit of the producer and two disinterested persons proving that the said oils were
actually used in agriculture, or in lieu thereof

(2) Should the producer belong to any producers association or federation, duly registered with the
Securities and Exchange Commission, the affidavit of the president of the association or
federation, attesting to the fact that the oils were actually used in agriculture.

(3) In the case of aviation oils, a sworn certificate satisfactory to the Collector proving that the
said oils were actually used in aviation: Provided, That no such refunds shall be granted in respect
to the oils used in aviation by citizens and corporations of foreign countries which do not grant
equivalent refunds or exemptions in respect to similar oils used in aviation by citizens and
corporations of the Philippines.

SEC. 2. Section one hundred and forty-five of the National Internal Revenue Code, as amended, is
further amended to read as follows:

SEC. 145. Specific Tax on Diesel fuel oil. -- On fuel oil, commercially known as diesel fuel oil,
and on all similar fuel oils, having more or less the same generating power, there shall be
collected, per metric ton, one peso.

xxxxxxxxx

Section 5. The proceeds of the additional tax on manufactured oils shall accrue to the road and
bridge funds of the political subdivision for whose benefit the tax is collected: Provided, however,
That whenever any oils mentioned above are used by miners or forest concessionaires in their
operations, twenty-five per centum of the specific tax paid thereon shall be refunded by the
Collector of Internal Revenue upon submission of proof of actual use of oils and under similar
conditions enumerated in subparagraphs one and two of section one hereof, amending section one
hundred forty-two of the Internal Revenue Code: Provided, further, That no new road shall be
constructed unless the route or location thereof shall have been approved by the Commissioner of
Public Highways after a determination that such road can be made part of an integral and
articulated route in the Philippine Highway System, as required in section twenty-six of the
Philippine Highway Act of 1953.

Subsequently, the 1977 NIRC, PD 1672 and EO 672 amended the first two provisions,
renumbering them and prescribing higher rates. Accordingly, petitioner paid specific taxes on
petroleum products purchased from July 1, 1980 to January 31, 1982 under the following statutory
provisions.

From February 8, 1980 to March 20, 1981, Sections 153 and 156 provided as follows:

SEC. 153. Specific tax on manufactured oils and other fuels. -- On refined and manufactured
mineral oils and motor fuels, there shall be collected the following taxes which shall attach to the
articles hereunder enumerated as soon as they are in existence as such:
(a) Kerosene, per liter of volume capacity, seven centavos;

(b) Lubricating oils, per liter of volume capacity, eighty centavos;

(c) Naphtha, gasoline and all other similar products of distillation, per liter of volume capacity,
ninety-one centavos: Provided, That, on premium and aviation gasoline, the tax shall be one peso
per liter of volume capacity;

(d) On denatured alcohol to be used for motive power, per liter of volume capacity, one centavo:
Provided, That, unless otherwise provided for by special laws, if the denatured alcohol is mixed
with gasoline, the specific tax on which has already been paid, only the alcohol content shall be
subject to the tax herein prescribed. For the purposes of this subsection, the removal of denatured
alcohol of not less than one hundred eighty degrees proof (ninety per centum absolute alcohol)
shall be deemed to have been removed for motive power, unless shown to the contrary;

(e) Processed gas, per liter of volume capacity, three centavos;

(f) Thinners and solvents, per liter of volume capacity, fifty-seven centavos;

(g) Liquefied petroleum gas, per kilogram, fourteen centavos: Provided, That, liquefied petroleum
gas used for motive power shall be taxed at the equivalent rate as the specific tax on diesel fuel
oil;

(h) Asphalts, per kilogram, eight centavos;

(i) Greases, waxes and petrolatum, per kilogram, fifty centavos;

(j) Aviation turbo jet fuel, per liter of volume capacity, fifty-five centavos. (As amended by Sec. 1,
P.D. No. 1672.)

xxxxxxxxx

SEC. 156. Specific tax on diesel fuel oil. -- On fuel oil, commercially known as diesel fuel oil, and
on all similar fuel oils, having more or less the same generating power, per liter of volume
capacity, seventeen and one-half centavos, which tax shall attach to this fuel oil as soon as it is in
existence as such."

Then on March 21, 1981, these provisions were amended by EO 672 to read:

SEC. 153. Specific tax on manufactured oils and other fuels. -- On refined and manufactured
mineral oils and motor fuels, there shall be collected the following taxes which shall attach to the
articles hereunder enumerated as soon as they are in existence as such:
(a) Kerosene, per liter of volume capacity, nine centavos;

(b) Lubricating oils, per liter of volume capacity, eighty centavos;

(c) Naphtha, gasoline and all other similar products of distillation, per liter of volume capacity,
one peso and six centavos: Provided, That on premium and aviation gasoline, the tax shall be one
peso and ten centavos and one peso, respectively, per liter of volume capacity;

(d) On denatured alcohol to be used for motive power, per liter of volume capacity, one centavo;
Provided, That unless otherwise provided for by special laws, if the denatured alcohol is mixed
with gasoline, the specific tax on which has already been paid, only the alcohol content shall be
subject to the tax herein prescribed. For the purpose of this subsection, the removal of denatured
alcohol of not less than one hundred eighty degrees proof (ninety per centum absolute alcohol)
shall be deemed to have been removed for motive power, unless shown to the contrary;

(e) Processed gas, per liter of volume capacity, three centavos;

(f) Thinners and solvents, per liter of volume capacity, sixty-one centavos;

(g) Liquefied petroleum gas, per kilogram, twenty-one centavos: Provided, That, liquified
petroleum gas used for motive power shall be taxed at the equivalent rate as the specific tax on
diesel fuel oil;

(h) Asphalts, per kilogram, twelve centavos;

(i) Greases, waxes and petrolatum, per kilogram, fifty centavos;

(j) Aviation turbo-jet fuel, per liter of volume capacity, sixty-four centavos.

xxxxxxxxx

SEC. 156. Specific tax on diesel fuel oil. -- On fuel oil, commercially known as diesel fuel oil, and
all similar fuel oils, having more or less the same generating power, per liter of volume capacity,
twenty-five and one-half centavos, which tax shall attach to this fuel oil as soon as it is in
existence as such.

A tax cannot be imposed unless it is supported by the clear and express language of a statute;[19]
on the other hand, once the tax is unquestionably imposed, [a] claim of exemption from tax
payments must be clearly shown and based on language in the law too plain to be mistaken.[20]
Since the partial refund authorized under Section 5, RA 1435, is in the nature of a tax exemption,
[21] it must be construed strictissimi juris against the grantee. Hence, petitioners claim of refund
on the basis of the specific taxes it actually paid must expressly be granted in a statute stated in a
language too clear to be mistaken.
We have carefully scrutinized RA 1435 and the subsequent pertinent statutes and found no
expression of a legislative will authorizing a refund based on the higher rates claimed by
petitioner. The mere fact that the privilege of refund was included in Section 5, and not in Section
1, is insufficient to support petitioners claim. When the law itself does not explicitly provide that a
refund under RA 1435 may be based on higher rates which were nonexistent at the time of its
enactment, this Court cannot presume otherwise. A legislative lacuna cannot be filled by judicial
fiat.[22]

The issue is not really novel. In Commissioner of Internal Revenue vs. Court of Appeals and Atlas
Consolidated Mining and Development Corporation[23] (the second Atlas case), the CIR
contended that the refund should be based on Sections 1 and 2 of RA 1435, not Sections 153 and
156 of the NIRC of 1977. In categorically ruling that Private Respondent Atlas Consolidated
Mining and Development Corporation was entitled to a refund based on Sections 1 and 2 of RA
1435, the Court, through Mr. Justice Hilario G. Davide, Jr., reiterated our pronouncement in
Commissioner of Internal Revenue vs. Rio Tuba Nickel and Mining Corporation:

Our Resolution of 25 March 1992 modifying our 30 September 1991 Decision in the Rio Tuba
case sets forth the controlling doctrine. In that Resolution, we stated:

Since the private respondents claim for refund covers specific taxes paid from 1980 to July 1983
then we find that the private respondent is entitled to a refund. It should be made clear, however,
that Rio Tuba is not entitled to the whole amount it claims as refund.

The specific taxes on oils which Rio Tuba paid for the aforesaid period were no longer based on
the rates specified by Sections 1 and 2 of R.A. No. 1435 but on the increased rates mandated
under Sections 153 and 156 of the National Internal Revenue Code of 1977. We note however,
that the latter law does not specifically provide for a refund to these mining and lumber companies
of specific taxes paid on manufactured and diesel fuel oils.

In Insular Lumber Co. v. Court of Tax Appeals, (104 SCRA 710 [1981]), the Court held that the
authorized partial refund under Section 5 of R.A. No. 1435 partakes of the nature of a tax
exemption and therefore cannot be allowed unless granted in the most explicit and categorical
language. Since the grant of refund privileges must be strictly construed against the taxpayer, the
basis for the refund shall be the amounts deemed paid under Sections 1 and 2 of R.A. No. 1435.

ACCORDINGLY, the decision in G.R. Nos. 83583-84 is hereby MODIFIED. The private
respondents CLAIM for REFUND is GRANTED, computed on the basis of the amounts deemed
paid under Sections 1 and 2 of R.A. NO. 1435, without interest.[24]

We rule, therefore, that since Atlass claims for refund cover specific taxes paid before 1985, it
should be granted the refund based on the rates specified by Sections 1 and 2 of R.A. No. 1435
and not on the increased rates under Sections 153 and 156 of the Tax Code of 1977, provided the
claims are not yet barred by prescription. (Underscoring supplied.)
Insular Lumber Co. and First Atlas Case Not Inconsistent With Rio Tuba
and Second Atlas Case

Petitioner argues that the applicable jurisprudence in this case should be Commissioner of Internal
Revenue vs. Atlas Consolidated and Mining Corp. (the first Atlas case), an unsigned resolution,
and Insular Lumber Co. vs. Court of Tax Appeals, an en banc decision.[25] Petitioner also asks the
Court to take a second look at Rio Tuba and the second Atlas case, both decided by Divisions, in
view of Insular which was decided en banc. Petitioner posits that [I]n view of the similarity of the
situation of herein petitioner with Insular Lumber Company (claimant in Insular Lumber) and Rio
Tuba Nickel Mining Corporation (claimant in Rio Tuba), a dilemma has been created as to
whether or not Insular Lumber, which has been decided by the Honorable Court en banc, or Rio
Tuba, which was decided only [by] the Third Division of the Honorable Court, should apply.[26]

We find no conflict between these two pairs of cases. Neither Insular Lumber Co. nor the first
Atlas case ruled on the issue of whether the refund privilege under Section 5 should be computed
based on the specific tax deemed paid under Sections 1 and 2 of RA 1435, regardless of what was
actually paid under the increased rates. Rio Tuba and the second Atlas case did.

Insular Lumber Co. decided a claim for refund on specific tax paid on petroleum products
purchased in the year 1963, when the increased rates under the NIRC of 1977 were not yet in
effect. Thus, the issue now before us did not exist at the time, since the applicable rates were still
those prescribed under Sections 1 and 2 of RA 1435.

On the other hand, the issue raised in the first Atlas case was whether the claimant was entitled to
the refund under Section 5, notwithstanding its failure to pay any additional tax under a municipal
or city ordinance. Although Atlas purchased petroleum products in the years 1976 to 1978 when
the rates had already been changed, the Court did not decide or make any pronouncement on the
issue in that case.

Clearly, it is impossible for these two decisions to clash with our pronouncement in Rio Tuba and
second Atlas case, in which we ruled that the refund granted be computed on the basis of the
amounts deemed paid under Sections 1 and 2 of RA 1435. In this light, we find no basis for
petitioners invocation of the constitutional proscription that no doctrine or principle of law laid
down by the Court in a decision rendered en banc or in division may be modified or reversed
except by the Court sitting en banc.[27]

Finally, petitioner asserts that equity and justice demand that the computation of the tax refunds be
based on actual amounts paid under Sections 153 and 156 of the NIRC.[28] We disagree.
According to an eminent authority on taxation, there is no tax exemption solely on the ground of
equity.[29]
WHEREFORE, the petition is hereby DENIED and the assailed Decision of the Court of Appeals
is AFFIRMED.

SO ORDERED.
Today is Thursday, August 09, 2018

Republic of the Philippines


SUPREME COURT
Manila

EN BANC

G.R. No. 92585 May 8, 1992

CALTEX PHILIPPINES, INC., petitioner,


vs.
THE HONORABLE COMMISSION ON AUDIT, HONORABLE COMMISSIONER
BARTOLOME C. FERNANDEZ and HONORABLE COMMISSIONER ALBERTO P. CRUZ,
respondents.

DAVIDE, JR., J.:

This is a petition erroneously brought under Rule 44 of the Rules of Court 1 questioning the
authority of the Commission on Audit (COA) in disallowing petitioner's claims for reimbursement
from the Oil Price Stabilization Fund (OPSF) and seeking the reversal of said Commission's
decision denying its claims for recovery of financing charges from the Fund and reimbursement of
underrecovery arising from sales to the National Power Corporation, Atlas Consolidated Mining
and Development Corporation (ATLAS) and Marcopper Mining Corporation (MAR-COPPER),
preventing it from exercising the right to offset its remittances against its reimbursement vis-a-vis
the OPSF and disallowing its claims which are still pending resolution before the Office of Energy
Affairs (OEA) and the Department of Finance (DOF).

Pursuant to the 1987 Constitution, 2 any decision, order or ruling of the Constitutional
Commissions 3 may be brought to this Court on certiorari by the aggrieved party within thirty (30)
days from receipt of a copy thereof. The certiorari referred to is the special civil action for
certiorari under Rule 65 of the Rules of Court. 4

Considering, however, that the allegations that the COA acted with:
(a) total lack of jurisdiction in completely ignoring and showing absolutely no respect for the
findings and rulings of the administrator of the fund itself and in disallowing a claim which is still
pending resolution at the OEA level, and (b) "grave abuse of discretion and completely without
jurisdiction" 5 in declaring that petitioner cannot avail of the right to offset any amount that it may
be required under the law to remit to the OPSF against any amount that it may receive by way of
reimbursement therefrom are sufficient to bring this petition within Rule 65 of the Rules of Court,
and, considering further the importance of the issues raised, the error in the designation of the
remedy pursued will, in this instance, be excused.

The issues raised revolve around the OPSF created under Section 8 of Presidential Decree (P.D.)
No. 1956, as amended by Executive Order (E.O.) No. 137. As amended, said Section 8 reads as
follows:

Sec. 8 . There is hereby created a Trust Account in the books of accounts of the Ministry of
Energy to be designated as Oil Price Stabilization Fund (OPSF) for the purpose of minimizing
frequent price changes brought about by exchange rate adjustments and/or changes in world
market prices of crude oil and imported petroleum products. The Oil Price Stabilization Fund may
be sourced from any of the following:

a) Any increase in the tax collection from ad valorem tax or customs duty imposed on
petroleum products subject to tax under this Decree arising from exchange rate adjustment, as may
be determined by the Minister of Finance in consultation with the Board of Energy;

b) Any increase in the tax collection as a result of the lifting of tax exemptions of government
corporations, as may be determined by the Minister of Finance in consultation with the Board of
Energy;

c) Any additional amount to be imposed on petroleum products to augment the resources of the
Fund through an appropriate Order that may be issued by the Board of Energy requiring payment
by persons or companies engaged in the business of importing, manufacturing and/or marketing
petroleum products;

d) Any resulting peso cost differentials in case the actual peso costs paid by oil companies in the
importation of crude oil and petroleum products is less than the peso costs computed using the
reference foreign exchange rate as fixed by the Board of Energy.

The Fund herein created shall be used for the following:

1) To reimburse the oil companies for cost increases in crude oil and imported petroleum
products resulting from exchange rate adjustment and/or increase in world market prices of crude
oil;

2) To reimburse the oil companies for possible cost under-recovery incurred as a result of the
reduction of domestic prices of petroleum products. The magnitude of the underrecovery, if any,
shall be determined by the Ministry of Finance. "Cost underrecovery" shall include the following:

i. Reduction in oil company take as directed by the Board of Energy without the corresponding
reduction in the landed cost of oil inventories in the possession of the oil companies at the time of
the price change;
ii. Reduction in internal ad valorem taxes as a result of foregoing government mandated price
reductions;

iii. Other factors as may be determined by the Ministry of Finance to result in cost
underrecovery.

The Oil Price Stabilization Fund (OPSF) shall be administered by the Ministry of Energy.

The material operative facts of this case, as gathered from the pleadings of the parties, are not
disputed.

On 2 February 1989, the COA sent a letter to Caltex Philippines, Inc. (CPI), hereinafter referred to
as Petitioner, directing the latter to remit to the OPSF its collection, excluding that unremitted for
the years 1986 and 1988, of the additional tax on petroleum products authorized under the
aforesaid Section 8 of P.D. No. 1956 which, as of 31 December 1987, amounted to
P335,037,649.00 and informing it that, pending such remittance, all of its claims for
reimbursement from the OPSF shall be held in abeyance. 6

On 9 March 1989, the COA sent another letter to petitioner informing it that partial verification
with the OEA showed that the grand total of its unremitted collections of the above tax is
P1,287,668,820.00, broken down as follows:

1986 — P233,190,916.00
1987 — 335,065,650.00
1988 — 719,412,254.00;

directing it to remit the same, with interest and surcharges thereon, within sixty (60) days from
receipt of the letter; advising it that the COA will hold in abeyance the audit of all its claims for
reimbursement from the OPSF; and directing it to desist from further offsetting the taxes collected
against outstanding claims in 1989 and subsequent periods. 7

In its letter of 3 May 1989, petitioner requested the COA for an early release of its reimbursement
certificates from the OPSF covering claims with the Office of Energy Affairs since June 1987 up
to March 1989, invoking in support thereof COA Circular No. 89-299 on the lifting of pre-audit of
government transactions of national government agencies and government-owned or controlled
corporations. 8

In its Answer dated 8 May 1989, the COA denied petitioner's request for the early release of the
reimbursement certificates from the OPSF and repeated its earlier directive to petitioner to
forward payment of the latter's unremitted collections to the OPSF to facilitate COA's audit action
on the reimbursement claims. 9

By way of a reply, petitioner, in a letter dated 31 May 1989, submitted to the COA a proposal for
the payment of the collections and the recovery of claims, since the outright payment of the sum
of P1.287 billion to the OEA as a prerequisite for the processing of said claims against the OPSF
will cause a very serious impairment of its cash position. 10 The proposal reads:

We, therefore, very respectfully propose the following:

(1) Any procedural arrangement acceptable to COA to facilitate monitoring of payments and
reimbursements will be administered by the ERB/Finance Dept./OEA, as agencies designated by
law to administer/regulate OPSF.

(2) For the retroactive period, Caltex will deliver to OEA, P1.287 billion as payment to OPSF,
similarly OEA will deliver to Caltex the same amount in cash reimbursement from OPSF.

(3) The COA audit will commence immediately and will be conducted expeditiously.

(4) The review of current claims (1989) will be conducted expeditiously to preclude further
accumulation of reimbursement from OPSF.

On 7 June 1989, the COA, with the Chairman taking no part, handed down Decision No. 921
accepting the above-stated proposal but prohibiting petitioner from further offsetting remittances
and reimbursements for the current and ensuing years. 11 Decision No. 921 reads:

This pertains to the within separate requests of Mr. Manuel A. Estrella, President, Petron
Corporation, and Mr. Francis Ablan, President and Managing Director, Caltex (Philippines) Inc.,
for reconsideration of this Commission's adverse action embodied in its letters dated February 2,
1989 and March 9, 1989, the former directing immediate remittance to the Oil Price Stabilization
Fund of collections made by the firms pursuant to P.D. 1956, as amended by E.O. No. 137, S.
1987, and the latter reiterating the same directive but further advising the firms to desist from
offsetting collections against their claims with the notice that "this Commission will hold in
abeyance the audit of all . . . claims for reimbursement from the OPSF."

It appears that under letters of authority issued by the Chairman, Energy Regulatory Board, the
aforenamed oil companies were allowed to offset the amounts due to the Oil Price Stabilization
Fund against their outstanding claims from the said Fund for the calendar years 1987 and 1988,
pending with the then Ministry of Energy, the government entity charged with administering the
OPSF. This Commission, however, expressing serious doubts as to the propriety of the offsetting
of all types of reimbursements from the OPSF against all categories of remittances, advised these
oil companies that such offsetting was bereft of legal basis. Aggrieved thereby, these companies
now seek reconsideration and in support thereof clearly manifest their intent to make
arrangements for the remittance to the Office of Energy Affairs of the amount of collections
equivalent to what has been previously offset, provided that this Commission authorizes the Office
of Energy Affairs to prepare the corresponding checks representing reimbursement from the
OPSF. It is alleged that the implementation of such an arrangement, whereby the remittance of
collections due to the OPSF and the reimbursement of claims from the Fund shall be made within
a period of not more than one week from each other, will benefit the Fund and not unduly
jeopardize the continuing daily cash requirements of these firms.

Upon a circumspect evaluation of the circumstances herein obtaining, this Commission perceives
no further objectionable feature in the proposed arrangement, provided that 15% of whatever
amount is due from the Fund is retained by the Office of Energy Affairs, the same to be
answerable for suspensions or disallowances, errors or discrepancies which may be noted in the
course of audit and surcharges for late remittances without prejudice to similar future retentions to
answer for any deficiency in such surcharges, and provided further that no offsetting of
remittances and reimbursements for the current and ensuing years shall be allowed.

Pursuant to this decision, the COA, on 18 August 1989, sent the following letter to Executive
Director Wenceslao R. De la Paz of the Office of Energy Affairs: 12

Dear Atty. dela Paz:

Pursuant to the Commission on Audit Decision No. 921 dated June 7, 1989, and based on our
initial verification of documents submitted to us by your Office in support of Caltex (Philippines),
Inc. offsets (sic) for the year 1986 to May 31, 1989, as well as its outstanding claims against the
Oil Price Stabilization Fund (OPSF) as of May 31, 1989, we are pleased to inform your Office that
Caltex (Philippines), Inc. shall be required to remit to OPSF an amount of P1,505,668,906,
representing remittances to the OPSF which were offset against its claims reimbursements (net of
unsubmitted claims). In addition, the Commission hereby authorize (sic) the Office of Energy
Affairs (OEA) to cause payment of P1,959,182,612 to Caltex, representing claims initially
allowed in audit, the details of which are presented hereunder: . . .

As presented in the foregoing computation the disallowances totalled P387,683,535, which


included P130,420,235 representing those claims disallowed by OEA, details of which is (sic)
shown in Schedule 1 as summarized as follows:

Disallowance of COA
Particulars Amount

Recovery of financing charges P162,728,475 /a


Product sales 48,402,398 /b
Inventory losses
Borrow loan arrangement 14,034,786 /c
Sales to Atlas/Marcopper 32,097,083 /d
Sales to NPC 558
——————
P257,263,300

Disallowances of OEA 130,420,235


————————— ——————
Total P387,683,535

The reasons for the disallowances are discussed hereunder:

a. Recovery of Financing Charges

Review of the provisions of P.D. 1596 as amended by E.O. 137 seems to indicate that recovery of
financing charges by oil companies is not among the items for which the OPSF may be utilized.
Therefore, it is our view that recovery of financing charges has no legal basis. The mechanism for
such claims is provided in DOF Circular 1-87.

b. Product Sales –– Sales to International Vessels/Airlines

BOE Resolution No. 87-01 dated February 7, 1987 as implemented by OEA Order No. 87-03-095
indicating that (sic) February 7, 1987 as the effectivity date that (sic) oil companies should pay
OPSF impost on export sales of petroleum products. Effective February 7, 1987 sales to
international vessels/airlines should not be included as part of its domestic sales. Changing the
effectivity date of the resolution from February 7, 1987 to October 20, 1987 as covered by
subsequent ERB Resolution No. 88-12 dated November 18, 1988 has allowed Caltex to include in
their domestic sales volumes to international vessels/airlines and claim the corresponding
reimbursements from OPSF during the period. It is our opinion that the effectivity of the said
resolution should be February 7, 1987.

c. Inventory losses –– Settlement of Ad Valorem

We reviewed the system of handling Borrow and Loan (BLA) transactions including the related
BLA agreement, as they affect the claims for reimbursements of ad valorem taxes. We observed
that oil companies immediately settle ad valorem taxes for BLA transaction (sic). Loan balances
therefore are not tax paid inventories of Caltex subject to reimbursements but those of the
borrower. Hence, we recommend reduction of the claim for July, August, and November, 1987
amounting to P14,034,786.

d. Sales to Atlas/Marcopper

LOI No. 1416 dated July 17, 1984 provides that "I hereby order and direct the suspension of
payment of all taxes, duties, fees, imposts and other charges whether direct or indirect due and
payable by the copper mining companies in distress to the national and local governments." It is
our opinion that LOI 1416 which implements the exemption from payment of OPSF imposts as
effected by OEA has no legal basis.

Furthermore, we wish to emphasize that payment to Caltex (Phil.) Inc., of the amount as herein
authorized shall be subject to availability of funds of OPSF as of May 31, 1989 and applicable
auditing rules and regulations. With regard to the disallowances, it is further informed that the
aggrieved party has 30 days within which to appeal the decision of the Commission in accordance
with law.

On 8 September 1989, petitioner filed an Omnibus Request for the Reconsideration of the decision
based on the following grounds: 13

A) COA-DISALLOWED CLAIMS ARE AUTHORIZED UNDER EXISTING RULES,


ORDERS, RESOLUTIONS, CIRCULARS ISSUED BY THE DEPARTMENT OF FINANCE
AND THE ENERGY REGULATORY BOARD PURSUANT TO EXECUTIVE ORDER NO.
137.

xxx xxx xxx

B) ADMINISTRATIVE INTERPRETATIONS IN THE COURSE OF EXERCISE OF


EXECUTIVE POWER BY DEPARTMENT OF FINANCE AND ENERGY REGULATORY
BOARD ARE LEGAL AND SHOULD BE RESPECTED AND APPLIED UNLESS DECLARED
NULL AND VOID BY COURTS OR REPEALED BY LEGISLATION.

xxx xxx xxx

C) LEGAL BASIS FOR RETENTION OF OFFSET ARRANGEMENT, AS AUTHORIZED BY


THE EXECUTIVE BRANCH OF GOVERNMENT, REMAINS VALID.

xxx xxx xxx

On 6 November 1989, petitioner filed with the COA a Supplemental Omnibus Request for
Reconsideration. 14

On 16 February 1990, the COA, with Chairman Domingo taking no part and with Commissioner
Fernandez dissenting in part, handed down Decision No. 1171 affirming the disallowance for
recovery of financing charges, inventory losses, and sales to MARCOPPER and ATLAS, while
allowing the recovery of product sales or those arising from export sales. 15 Decision No. 1171
reads as follows:

Anent the recovery of financing charges you contend that Caltex Phil. Inc. has the .authority to
recover financing charges from the OPSF on the basis of Department of Finance (DOF) Circular
1-87, dated February 18, 1987, which allowed oil companies to "recover cost of financing working
capital associated with crude oil shipments," and provided a schedule of reimbursement in terms
of peso per barrel. It appears that on November 6, 1989, the DOF issued a memorandum to the
President of the Philippines explaining the nature of these financing charges and justifying their
reimbursement as follows:

As part of your program to promote economic recovery, . . . oil companies (were authorized) to
refinance their imports of crude oil and petroleum products from the normal trade credit of 30
days up to 360 days from date of loading . . . Conformably . . ., the oil companies deferred their
foreign exchange remittances for purchases by refinancing their import bills from the normal 30-
day payment term up to the desired 360 days. This refinancing of importations carried additional
costs (financing charges) which then became, due to government mandate, an inherent part of the
cost of the purchases of our country's oil requirement.

We beg to disagree with such contention. The justification that financing charges increased oil
costs and the schedule of reimbursement rate in peso per barrel (Exhibit 1) used to support alleged
increase (sic) were not validated in our independent inquiry. As manifested in Exhibit 2, using the
same formula which the DOF used in arriving at the reimbursement rate but using comparable
percentages instead of pesos, the ineluctable conclusion is that the oil companies are actually
gaining rather than losing from the extension of credit because such extension enables them to
invest the collections in marketable securities which have much higher rates than those they incur
due to the extension. The Data we used were obtained from CPI (CALTEX) Management and can
easily be verified from our records.

With respect to product sales or those arising from sales to international vessels or airlines, . . ., it
is believed that export sales (product sales) are entitled to claim refund from the OPSF.

As regard your claim for underrecovery arising from inventory losses, . . . It is the considered
view of this Commission that the OPSF is not liable to refund such surtax on inventory losses
because these are paid to BIR and not OPSF, in view of which CPI (CALTEX) should seek refund
from BIR. . . .

Finally, as regards the sales to Atlas and Marcopper, it is represented that you are entitled to claim
recovery from the OPSF pursuant to LOI 1416 issued on July 17, 1984, since these copper mining
companies did not pay CPI (CALTEX) and OPSF imposts which were added to the selling price.

Upon a circumspect evaluation, this Commission believes and so holds that the CPI (CALTEX)
has no authority to claim reimbursement for this uncollected OPSF impost because LOI 1416
dated July 17, 1984, which exempts distressed mining companies from "all taxes, duties, import
fees and other charges" was issued when OPSF was not yet in existence and could not have
contemplated OPSF imposts at the time of its formulation. Moreover, it is evident that OPSF was
not created to aid distressed mining companies but rather to help the domestic oil industry by
stabilizing oil prices.

Unsatisfied with the decision, petitioner filed on 28 March 1990 the present petition wherein it
imputes to the COA the commission of the following errors: 16

RESPONDENT COMMISSION ERRED IN DISALLOWING RECOVERY OF FINANCING


CHARGES FROM THE OPSF.

II
RESPONDENT COMMISSION ERRED IN DISALLOWING
CPI's 17 CLAIM FOR REIMBURSEMENT OF UNDERRECOVERY ARISING FROM SALES
TO NPC.

III

RESPONDENT COMMISSION ERRED IN DENYING CPI's CLAIMS FOR


REIMBURSEMENT ON SALES TO ATLAS AND MARCOPPER.

IV

RESPONDENT COMMISSION ERRED IN PREVENTING CPI FROM EXERCISING ITS


LEGAL RIGHT TO OFFSET ITS REMITTANCES AGAINST ITS REIMBURSEMENT VIS-A-
VIS THE OPSF.

RESPONDENT COMMISSION ERRED IN DISALLOWING CPI's CLAIMS WHICH ARE


STILL PENDING RESOLUTION BY (SIC) THE OEA AND THE DOF.

In the Resolution of 5 April 1990, this Court required the respondents to comment on the petition
within ten (10) days from notice. 18

On 6 September 1990, respondents COA and Commissioners Fernandez and Cruz, assisted by the
Office of the Solicitor General, filed their Comment. 19

This Court resolved to give due course to this petition on 30 May 1991 and required the parties to
file their respective Memoranda within twenty (20) days from notice. 20

In a Manifestation dated 18 July 1991, the Office of the Solicitor General prays that the Comment
filed on 6 September 1990 be considered as the Memorandum for respondents. 21

Upon the other hand, petitioner filed its Memorandum on 14 August 1991.

I. Petitioner dwells lengthily on its first assigned error contending, in support thereof, that:

(1) In view of the expanded role of the OPSF pursuant to Executive Order No. 137, which added
a second purpose, to wit:

2) To reimburse the oil companies for possible cost underrecovery incurred as a result of the
reduction of domestic prices of petroleum products. The magnitude of the underrecovery, if any,
shall be determined by the Ministry of Finance. "Cost underrecovery" shall include the following:
i. Reduction in oil company take as directed by the Board of Energy without the corresponding
reduction in the landed cost of oil inventories in the possession of the oil companies at the time of
the price change;

ii. Reduction in internal ad valorem taxes as a result of foregoing government mandated price
reductions;

iii. Other factors as may be determined by the Ministry of Finance to result in cost
underrecovery.

the "other factors" mentioned therein that may be determined by the Ministry (now Department)
of Finance may include financing charges for "in essence, financing charges constitute
unrecovered cost of acquisition of crude oil incurred by the oil companies," as explained in the 6
November 1989 Memorandum to the President of the Department of Finance; they "directly
translate to cost underrecovery in cases where the money market placement rates decline and at
the same time the tax on interest income increases. The relationship is such that the presence of
underrecovery or overrecovery is directly dependent on the amount and extent of financing
charges."

(2) The claim for recovery of financing charges has clear legal and factual basis; it was filed on
the basis of Department of Finance Circular No.
1-87, dated 18 February 1987, which provides:

To allow oil companies to recover the costs of financing working capital associated with crude oil
shipments, the following guidelines on the utilization of the Oil Price Stabilization Fund
pertaining to the payment of the foregoing (sic) exchange risk premium and recovery of financing
charges will be implemented:

1. The OPSF foreign exchange premium shall be reduced to a flat rate of one (1) percent for the
first (6) months and 1/32 of one percent per month thereafter up to a maximum period of one year,
to be applied on crude oil' shipments from January 1, 1987. Shipments with outstanding financing
as of January 1, 1987 shall be charged on the basis of the fee applicable to the remaining period of
financing.

2. In addition, for shipments loaded after January 1987, oil companies shall be allowed to
recover financing charges directly from the OPSF per barrel of crude oil based on the following
schedule:

Financing Period Reimbursement Rate


Pesos per Barrel

Less than 180 days None


180 days to 239 days 1.90
241 (sic) days to 299 4.02
300 days to 369 (sic) days 6.16
360 days or more 8.28

The above rates shall be subject to review every sixty


days. 22

Pursuant to this circular, the Department of Finance, in its letter of 18 February 1987, advised the
Office of Energy Affairs as follows:

HON. VICENTE T. PATERNO


Deputy Executive Secretary
For Energy Affairs
Office of the President
Makati, Metro Manila

Dear Sir:

This refers to the letters of the Oil Industry dated December 4, 1986 and February 5, 1987 and
subsequent discussions held by the Price Review committee on February 6, 1987.

On the basis of the representations made, the Department of Finance recognizes the necessity to
reduce the foreign exchange risk premium accruing to the Oil Price Stabilization Fund (OPSF).
Such a reduction would allow the industry to recover partly associated financing charges on crude
oil imports. Accordingly, the OPSF foreign exchange risk fee shall be reduced to a flat charge of
1% for the first six (6) months plus 1/32% of 1% per month thereafter up to a maximum period of
one year, effective January 1, 1987. In addition, since the prevailing company take would still
leave unrecovered financing charges, reimbursement may be secured from the OPSF in
accordance with the provisions of the attached Department of Finance circular. 23

Acting on this letter, the OEA issued on 4 May 1987 Order No. 87-05-096 which contains the
guidelines for the computation of the foreign exchange risk fee and the recovery of financing
charges from the OPSF, to wit:

B. FINANCE CHARGES

1. Oil companies shall be allowed to recover financing charges directly from the OPSF for both
crude and product shipments loaded after January 1, 1987 based on the following rates:

Financing Period Reimbursement Rate


(PBbl.)

Less than 180 days None


180 days to 239 days 1.90
240 days to 229 (sic) days 4.02
300 days to 359 days 6.16
360 days to more 8.28

2. The above rates shall be subject to review every sixty days. 24

Then on 22 November 1988, the Department of Finance issued Circular No. 4-88 imposing further
guidelines on the recoverability of financing charges, to wit:

Following are the supplemental rules to Department of Finance Circular No. 1-87 dated February
18, 1987 which allowed the recovery of financing charges directly from the Oil Price Stabilization
Fund. (OPSF):

1. The Claim for reimbursement shall be on a per shipment basis.

2. The claim shall be filed with the Office of Energy Affairs together with the claim on peso
cost differential for a particular shipment and duly certified supporting documents provided for
under Ministry of Finance No. 11-85.

3. The reimbursement shall be on the form of reimbursement certificate (Annex A) to be issued


by the Office of Energy Affairs. The said certificate may be used to offset against amounts payable
to the OPSF. The oil companies may also redeem said certificates in cash if not utilized, subject to
availability of funds. 25

The OEA disseminated this Circular to all oil companies in its Memorandum Circular No. 88-12-
017. 26

The COA can neither ignore these issuances nor formulate its own interpretation of the laws in the
light of the determination of executive agencies. The determination by the Department of Finance
and the OEA that financing charges are recoverable from the OPSF is entitled to great weight and
consideration. 27 The function of the COA, particularly in the matter of allowing or disallowing
certain expenditures, is limited to the promulgation of accounting and auditing rules for, among
others, the disallowance of irregular, unnecessary, excessive, extravagant, or unconscionable
expenditures, or uses of government funds and properties. 28

(3) Denial of petitioner's claim for reimbursement would be inequitable. Additionally, COA's
claim that petitioner is gaining, instead of losing, from the extension of credit, is belatedly raised
and not supported by expert analysis.

In impeaching the validity of petitioner's assertions, the respondents argue that:

1. The Constitution gives the COA discretionary power to disapprove irregular or unnecessary
government expenditures and as the monetary claims of petitioner are not allowed by law, the
COA acted within its jurisdiction in denying them;
2. P.D. No. 1956 and E.O. No. 137 do not allow reimbursement of financing charges from the
OPSF;

3. Under the principle of ejusdem generis, the "other factors" mentioned in the second purpose
of the OPSF pursuant to E.O. No. 137 can only include "factors which are of the same nature or
analogous to those enumerated;"

4. In allowing reimbursement of financing charges from OPSF, Circular No. 1-87 of the
Department of Finance violates P.D. No. 1956 and E.O. No. 137; and

5. Department of Finance rules and regulations implementing P.D. No. 1956 do not likewise
allow reimbursement of financing
charges. 29

We find no merit in the first assigned error.

As to the power of the COA, which must first be resolved in view of its primacy, We find the
theory of petitioner –– that such does not extend to the disallowance of irregular, unnecessary,
excessive, extravagant, or unconscionable expenditures, or use of government funds and
properties, but only to the promulgation of accounting and auditing rules for, among others, such
disallowance –– to be untenable in the light of the provisions of the 1987 Constitution and related
laws.

Section 2, Subdivision D, Article IX of the 1987 Constitution expressly provides:

Sec. 2(l). The Commission on Audit shall have the power, authority, and duty to examine, audit,
and settle all accounts pertaining to the revenue and receipts of, and expenditures or uses of funds
and property, owned or held in trust by, or pertaining to, the Government, or any of its
subdivisions, agencies, or instrumentalities, including government-owned and controlled
corporations with original charters, and on a post-audit basis: (a) constitutional bodies,
commissions and offices that have been granted fiscal autonomy under this Constitution; (b)
autonomous state colleges and universities; (c) other government-owned or controlled
corporations and their subsidiaries; and (d) such non-governmental entities receiving subsidy or
equity, directly or indirectly, from or through the government, which are required by law or the
granting institution to submit to such audit as a condition of subsidy or equity. However, where the
internal control system of the audited agencies is inadequate, the Commission may adopt such
measures, including temporary or special pre-audit, as are necessary and appropriate to correct the
deficiencies. It shall keep the general accounts, of the Government and, for such period as may be
provided by law, preserve the vouchers and other supporting papers pertaining thereto.

(2) The Commission shall have exclusive authority, subject to the limitations in this Article, to
define the scope of its audit and examination, establish the techniques and methods required
therefor, and promulgate accounting and auditing rules and regulations, including those for the
prevention and disallowance of irregular, unnecessary, excessive, extravagant, or, unconscionable
expenditures, or uses of government funds and properties.

These present powers, consistent with the declared independence of the Commission, 30 are
broader and more extensive than that conferred by the 1973 Constitution. Under the latter, the
Commission was empowered to:

Examine, audit, and settle, in accordance with law and regulations, all accounts pertaining to the
revenues, and receipts of, and expenditures or uses of funds and property, owned or held in trust
by, or pertaining to, the Government, or any of its subdivisions, agencies, or instrumentalities
including government-owned or controlled corporations, keep the general accounts of the
Government and, for such period as may be provided by law, preserve the vouchers pertaining
thereto; and promulgate accounting and auditing rules and regulations including those for the
prevention of irregular, unnecessary, excessive, or extravagant expenditures or uses of funds and
property. 31

Upon the other hand, under the 1935 Constitution, the power and authority of the COA's
precursor, the General Auditing Office, were, unfortunately, limited; its very role was markedly
passive. Section 2 of Article XI thereof provided:

Sec. 2. The Auditor General shall examine, audit, and settle all accounts pertaining to the
revenues and receipts from whatever source, including trust funds derived from bond issues; and
audit, in accordance with law and administrative regulations, all expenditures of funds or property
pertaining to or held in trust by the Government or the provinces or municipalities thereof. He
shall keep the general accounts of the Government and the preserve the vouchers pertaining
thereto. It shall be the duty of the Auditor General to bring to the attention of the proper
administrative officer expenditures of funds or property which, in his opinion, are irregular,
unnecessary, excessive, or extravagant. He shall also perform such other functions as may be
prescribed by law.

As clearly shown above, in respect to irregular, unnecessary, excessive or extravagant


expenditures or uses of funds, the 1935 Constitution did not grant the Auditor General the power
to issue rules and regulations to prevent the same. His was merely to bring that matter to the
attention of the proper administrative officer.

The ruling on this particular point, quoted by petitioner from the cases of Guevarra vs. Gimenez
32 and Ramos vs. Aquino, 33 are no longer controlling as the two (2) were decided in the light of
the 1935 Constitution.

There can be no doubt, however, that the audit power of the Auditor General under the 1935
Constitution and the Commission on Audit under the 1973 Constitution authorized them to
disallow illegal expenditures of funds or uses of funds and property. Our present Constitution
retains that same power and authority, further strengthened by the definition of the COA's general
jurisdiction in Section 26 of the Government Auditing Code of the Philippines 34 and
Administrative Code of 1987. 35 Pursuant to its power to promulgate accounting and auditing
rules and regulations for the prevention of irregular, unnecessary, excessive or extravagant
expenditures or uses of funds, 36 the COA promulgated on 29 March 1977 COA Circular No. 77-
55. Since the COA is responsible for the enforcement of the rules and regulations, it goes without
saying that failure to comply with them is a ground for disapproving the payment of the proposed
expenditure. As observed by one of the Commissioners of the 1986 Constitutional Commission,
Fr. Joaquin G. Bernas: 37

It should be noted, however, that whereas under Article XI, Section 2, of the 1935 Constitution the
Auditor General could not correct "irregular, unnecessary, excessive or extravagant" expenditures
of public funds but could only "bring [the matter] to the attention of the proper administrative
officer," under the 1987 Constitution, as also under the 1973 Constitution, the Commission on
Audit can "promulgate accounting and auditing rules and regulations including those for the
prevention and disallowance of irregular, unnecessary, excessive, extravagant, or unconscionable
expenditures or uses of government funds and properties." Hence, since the Commission on Audit
must ultimately be responsible for the enforcement of these rules and regulations, the failure to
comply with these regulations can be a ground for disapproving the payment of a proposed
expenditure.

Indeed, when the framers of the last two (2) Constitutions conferred upon the COA a more active
role and invested it with broader and more extensive powers, they did not intend merely to make
the COA a toothless tiger, but rather envisioned a dynamic, effective, efficient and independent
watchdog of the Government.

The issue of the financing charges boils down to the validity of Department of Finance Circular
No. 1-87, Department of Finance Circular No. 4-88 and the implementing circulars of the OEA,
issued pursuant to Section 8, P.D. No. 1956, as amended by E.O. No. 137, authorizing it to
determine "other factors" which may result in cost underrecovery and a consequent reimbursement
from the OPSF.

The Solicitor General maintains that, following the doctrine of ejusdem generis, financing charges
are not included in "cost underrecovery" and, therefore, cannot be considered as one of the "other
factors." Section 8 of P.D. No. 1956, as amended by E.O. No. 137, does not explicitly define what
"cost underrecovery" is. It merely states what it includes. Thus:

. . . "Cost underrecovery" shall include the following:

i. Reduction in oil company takes as directed by the Board of Energy without the
corresponding reduction in the landed cost of oil inventories in the possession of the oil companies
at the time of the price change;

ii. Reduction in internal ad valorem taxes as a result of foregoing government mandated price
reductions;

iii. Other factors as may be determined by the Ministry of Finance to result in cost
underrecovery.

These "other factors" can include only those which are of the same class or nature as the two
specifically enumerated in subparagraphs (i) and (ii). A common characteristic of both is that they
are in the nature of government mandated price reductions. Hence, any other factor which seeks to
be a part of the enumeration, or which could qualify as a cost underrecovery, must be of the same
class or nature as those specifically enumerated.

Petitioner, however, suggests that E.O. No. 137 intended to grant the Department of Finance broad
and unrestricted authority to determine or define "other factors."

Both views are unacceptable to this Court.

The rule of ejusdem generis states that "[w]here general words follow an enumeration of persons
or things, by words of a particular and specific meaning, such general words are not to be
construed in their widest extent, but are held to be as applying only to persons or things of the
same kind or class as those specifically mentioned. 38 A reading of subparagraphs (i) and (ii)
easily discloses that they do not have a common characteristic. The first relates to price reduction
as directed by the Board of Energy while the second refers to reduction in internal ad valorem
taxes. Therefore, subparagraph (iii) cannot be limited by the enumeration in these subparagraphs.
What should be considered for purposes of determining the "other factors" in subparagraph (iii) is
the first sentence of paragraph (2) of the Section which explicitly allows cost underrecovery only
if such were incurred as a result of the reduction of domestic prices of petroleum products.

Although petitioner's financing losses, if indeed incurred, may constitute cost underrecovery in the
sense that such were incurred as a result of the inability to fully offset financing expenses from
yields in money market placements, they do not, however, fall under the foregoing provision of
P.D. No. 1956, as amended, because the same did not result from the reduction of the domestic
price of petroleum products. Until paragraph (2), Section 8 of the decree, as amended, is further
amended by Congress, this Court can do nothing. The duty of this Court is not to legislate, but to
apply or interpret the law. Be that as it may, this Court wishes to emphasize that as the facts in this
case have shown, it was at the behest of the Government that petitioner refinanced its oil import
payments from the normal 30-day trade credit to a maximum of 360 days. Petitioner could be
correct in its assertion that owing to the extended period for payment, the financial institution
which refinanced said payments charged a higher interest, thereby resulting in higher financing
expenses for the petitioner. It would appear then that equity considerations dictate that petitioner
should somehow be allowed to recover its financing losses, if any, which may have been sustained
because it accommodated the request of the Government. Although under Section 29 of the
National Internal Revenue Code such losses may be deducted from gross income, the effect of that
loss would be merely to reduce its taxable income, but not to actually wipe out such losses. The
Government then may consider some positive measures to help petitioner and others similarly
situated to obtain substantial relief. An amendment, as aforestated, may then be in order.

Upon the other hand, to accept petitioner's theory of "unrestricted authority" on the part of the
Department of Finance to determine or define "other factors" is to uphold an undue delegation of
legislative power, it clearly appearing that the subject provision does not provide any standard for
the exercise of the authority. It is a fundamental rule that delegation of legislative power may be
sustained only upon the ground that some standard for its exercise is provided and that the
legislature, in making the delegation, has prescribed the manner of the exercise of the delegated
authority. 39

Finally, whether petitioner gained or lost by reason of the extensive credit is rendered irrelevant by
reason of the foregoing disquisitions. It may nevertheless be stated that petitioner failed to
disprove COA's claim that it had in fact gained in the process. Otherwise stated, petitioner failed
to sufficiently show that it incurred a loss. Such being the case, how can petitioner claim for
reimbursement? It cannot have its cake and eat it too.

II. Anent the claims arising from sales to the National Power Corporation, We find for the
petitioner. The respondents themselves admit in their Comment that underrecovery arising from
sales to NPC are reimbursable because NPC was granted full exemption from the payment of
taxes; to prove this, respondents trace the laws providing for such exemption. 40 The last law cited
is the Fiscal Incentives Regulatory Board's Resolution No. 17-87 of 24 June 1987 which provides,
in part, "that the tax and duty exemption privileges of the National Power Corporation, including
those pertaining to its domestic purchases of petroleum and petroleum products . . . are restored
effective March 10, 1987." In a Memorandum issued on 5 October 1987 by the Office of the
President, NPC's tax exemption was confirmed and approved.

Furthermore, as pointed out by respondents, the intention to exempt sales of petroleum products to
the NPC is evident in the recently passed Republic Act No. 6952 establishing the Petroleum Price
Standby Fund to support the OPSF. 41 The pertinent part of Section 2, Republic Act No. 6952
provides:

Sec. 2. Application of the Fund shall be subject to the following conditions:

(1) That the Fund shall be used to reimburse the oil companies for (a) cost increases of imported
crude oil and finished petroleum products resulting from foreign exchange rate adjustments and/or
increases in world market prices of crude oil; (b) cost underrecovery incurred as a result of fuel oil
sales to the National Power Corporation (NPC); and (c) other cost underrecoveries incurred as
may be finally decided by the Supreme
Court; . . .

Hence, petitioner can recover its claim arising from sales of petroleum products to the National
Power Corporation.

III. With respect to its claim for reimbursement on sales to ATLAS and MARCOPPER, petitioner
relies on Letter of Instruction (LOI) 1416, dated 17 July 1984, which ordered the suspension of
payments of all taxes, duties, fees and other charges, whether direct or indirect, due and payable
by the copper mining companies in distress to the national government. Pursuant to this LOI, then
Minister of Energy, Hon. Geronimo Velasco, issued Memorandum Circular No. 84-11-22 advising
the oil companies that Atlas Consolidated Mining Corporation and Marcopper Mining Corporation
are among those declared to be in distress.

In denying the claims arising from sales to ATLAS and MARCOPPER, the COA, in its 18 August
1989 letter to Executive Director Wenceslao R. de la Paz, states that "it is our opinion that LOI
1416 which implements the exemption from payment of OPSF imposts as effected by OEA has no
legal basis;" 42 in its Decision No. 1171, it ruled that "the CPI (CALTEX) (Caltex) has no
authority to claim reimbursement for this uncollected impost because LOI 1416 dated July 17,
1984, . . . was issued when OPSF was not yet in existence and could not have contemplated OPSF
imposts at the time of its formulation." 43 It is further stated that: "Moreover, it is evident that
OPSF was not created to aid distressed mining companies but rather to help the domestic oil
industry by stabilizing oil prices."

In sustaining COA's stand, respondents vigorously maintain that LOI 1416 could not have
intended to exempt said distressed mining companies from the payment of OPSF dues for the
following reasons:

a. LOI 1416 granting the alleged exemption was issued on July 17, 1984. P.D. 1956 creating the
OPSF was promulgated on October 10, 1984, while E.O. 137, amending P.D. 1956, was issued on
February 25, 1987.

b. LOI 1416 was issued in 1984 to assist distressed copper mining companies in line with the
government's effort to prevent the collapse of the copper industry. P.D No. 1956, as amended, was
issued for the purpose of minimizing frequent price changes brought about by exchange rate
adjustments and/or changes in world market prices of crude oil and imported petroleum product's;
and

c. LOI 1416 caused the "suspension of all taxes, duties, fees, imposts and other charges,
whether direct or indirect, due and payable by the copper mining companies in distress to the
Notional and Local Governments . . ." On the other hand, OPSF dues are not payable by (sic)
distressed copper companies but by oil companies. It is to be noted that the copper mining
companies do not pay OPSF dues. Rather, such imposts are built in or already incorporated in the
prices of oil products. 44

Lastly, respondents allege that while LOI 1416 suspends the payment of taxes by distressed
mining companies, it does not accord petitioner the same privilege with respect to its obligation to
pay OPSF dues.

We concur with the disquisitions of the respondents. Aside from such reasons, however, it is
apparent that LOI 1416 was never published in the Official Gazette 45 as required by Article 2 of
the Civil Code, which reads:

Laws shall take effect after fifteen days following the completion of their publication in the
Official Gazette, unless it is otherwise provided. . . .

In applying said provision, this Court ruled in the case of Tañada vs. Tuvera: 46

WHEREFORE, the Court hereby orders respondents to publish in the Official Gazette all
unpublished presidential issuances which are of general application, and unless so published they
shall have no binding force and effect.

Resolving the motion for reconsideration of said decision, this Court, in its Resolution
promulgated on 29 December 1986, 47 ruled:

We hold therefore that all statutes, including those of local application and private laws, shall be
published as a condition for their effectivity, which shall begin fifteen days after publication unless
a different effectivity date is fixed by the legislature.

Covered by this rule are presidential decrees and executive orders promulgated by the President in
the exercise of legislative powers whenever the same are validly delegated by the legislature or, at
present, directly conferred by the Constitution. Administrative rules and regulations must also be
published if their purpose is to enforce or implement existing laws pursuant also to a valid
delegation.

xxx xxx xxx

WHEREFORE, it is hereby declared that all laws as above defined shall immediately upon their
approval, or as soon thereafter as possible, be published in full in the Official Gazette, to become
effective only after fifteen days from their publication, or on another date specified by the
legislature, in accordance with Article 2 of the Civil Code.

LOI 1416 has, therefore, no binding force or effect as it was never published in the Official
Gazette after its issuance or at any time after the decision in the abovementioned cases.

Article 2 of the Civil Code was, however, later amended by Executive Order No. 200, issued on
18 June 1987. As amended, the said provision now reads:

Laws shall take effect after fifteen days following the completion of their publication either in the
Official Gazette or in a newspaper of general circulation in the Philippines, unless it is otherwise
provided.

We are not aware of the publication of LOI 1416 in any newspaper of general circulation pursuant
to Executive Order No. 200.

Furthermore, even granting arguendo that LOI 1416 has force and effect, petitioner's claim must
still fail. Tax exemptions as a general rule are construed strictly against the grantee and liberally in
favor of the taxing authority. 48 The burden of proof rests upon the party claiming exemption to
prove that it is in fact covered by the exemption so claimed. The party claiming exemption must
therefore be expressly mentioned in the exempting law or at least be within its purview by clear
legislative intent.

In the case at bar, petitioner failed to prove that it is entitled, as a consequence of its sales to
ATLAS and MARCOPPER, to claim reimbursement from the OPSF under LOI 1416. Though
LOI 1416 may suspend the payment of taxes by copper mining companies, it does not give
petitioner the same privilege with respect to the payment of OPSF dues.

IV. As to COA's disallowance of the amount of P130,420,235.00, petitioner maintains that the
Department of Finance has still to issue a final and definitive ruling thereon; accordingly, it was
premature for COA to disallow it. By doing so, the latter acted beyond its jurisdiction. 49
Respondents, on the other hand, contend that said amount was already disallowed by the OEA for
failure to substantiate it. 50 In fact, when OEA submitted the claims of petitioner for pre-audit, the
abovementioned amount was already excluded.

An examination of the records of this case shows that petitioner failed to prove or substantiate its
contention that the amount of P130,420,235.00 is still pending before the OEA and the DOF.
Additionally, We find no reason to doubt the submission of respondents that said amount has
already been passed upon by the OEA. Hence, the ruling of respondent COA disapproving said
claim must be upheld.

V. The last issue to be resolved in this case is whether or not the amounts due to the OPSF from
petitioner may be offset against petitioner's outstanding claims from said fund. Petitioner contends
that it should be allowed to offset its claims from the OPSF against its contributions to the fund as
this has been allowed in the past, particularly in the years 1987 and 1988. 51

Furthermore, petitioner cites, as bases for offsetting, the provisions of the New Civil Code on
compensation and Section 21, Book V, Title I-B of the Revised Administrative Code which
provides for "Retention of Money for Satisfaction of Indebtedness to Government." 52 Petitioner
also mentions communications from the Board of Energy and the Department of Finance that
supposedly authorize compensation.

Respondents, on the other hand, citing Francia vs. IAC and Fernandez, 53 contend that there can
be no offsetting of taxes against the claims that a taxpayer may have against the government, as
taxes do not arise from contracts or depend upon the will of the taxpayer, but are imposed by law.
Respondents also allege that petitioner's reliance on Section 21, Book V, Title I-B of the Revised
Administrative Code, is misplaced because "while this provision empowers the COA to withhold
payment of a government indebtedness to a person who is also indebted to the government and
apply the government indebtedness to the satisfaction of the obligation of the person to the
government, like authority or right to make compensation is not given to the private person." 54
The reason for this, as stated in Commissioner of Internal Revenue vs. Algue, Inc., 55 is that
money due the government, either in the form of taxes or other dues, is its lifeblood and should be
collected without hindrance. Thus, instead of giving petitioner a reason for compensation or set-
off, the Revised Administrative Code makes it the respondents' duty to collect petitioner's
indebtedness to the OPSF.

Refuting respondents' contention, petitioner claims that the amounts due from it do not arise as a
result of taxation because "P.D. 1956, amended, did not create a source of taxation; it instead
established a special fund . . .," 56 and that the OPSF contributions do not go to the general fund
of the state and are not used for public purpose, i.e., not for the support of the government, the
administration of law, or the payment of public expenses. This alleged lack of a public purpose
behind OPSF exactions distinguishes such from a tax. Hence, the ruling in the Francia case is
inapplicable.

Lastly, petitioner cites R.A. No. 6952 creating the Petroleum Price Standby Fund to support the
OPSF; the said law provides in part that:

Sec. 2. Application of the fund shall be subject to the following conditions:

xxx xxx xxx

(3) That no amount of the Petroleum Price Standby Fund shall be used to pay any oil company
which has an outstanding obligation to the Government without said obligation being offset first,
subject to the requirements of compensation or offset under the Civil Code.

We find no merit in petitioner's contention that the OPSF contributions are not for a public
purpose because they go to a special fund of the government. Taxation is no longer envisioned as a
measure merely to raise revenue to support the existence of the government; taxes may be levied
with a regulatory purpose to provide means for the rehabilitation and stabilization of a threatened
industry which is affected with public interest as to be within the police power of the state. 57
There can be no doubt that the oil industry is greatly imbued with public interest as it vitally
affects the general welfare. Any unregulated increase in oil prices could hurt the lives of a majority
of the people and cause economic crisis of untold proportions. It would have a chain reaction in
terms of, among others, demands for wage increases and upward spiralling of the cost of basic
commodities. The stabilization then of oil prices is of prime concern which the state, via its police
power, may properly address.

Also, P.D. No. 1956, as amended by E.O. No. 137, explicitly provides that the source of OPSF is
taxation. No amount of semantical juggleries could dim this fact.

It is settled that a taxpayer may not offset taxes due from the claims that he may have against the
government. 58 Taxes cannot be the subject of compensation because the government and
taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not such a
debt, demand, contract or judgment as is allowed to be set-off. 59

We may even further state that technically, in respect to the taxes for the OPSF, the oil companies
merely act as agents for the Government in the latter's collection since the taxes are, in reality,
passed unto the end-users –– the consuming public. In that capacity, the petitioner, as one of such
companies, has the primary obligation to account for and remit the taxes collected to the
administrator of the OPSF. This duty stems from the fiduciary relationship between the two;
petitioner certainly cannot be considered merely as a debtor. In respect, therefore, to its collection
for the OPSF vis-a-vis its claims for reimbursement, no compensation is likewise legally feasible.
Firstly, the Government and the petitioner cannot be said to be mutually debtors and creditors of
each other. Secondly, there is no proof that petitioner's claim is already due and liquidated. Under
Article 1279 of the Civil Code, in order that compensation may be proper, it is necessary that:

(1) each one of the obligors be bound principally, and that he be at the same time a principal
creditor of the other;

(2) both debts consist in a sum of :money, or if the things due are consumable, they be of the
same kind, and also of the same quality if the latter has been stated;

(3) the two (2) debts be due;

(4) they be liquidated and demandable;

(5) over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor.

That compensation had been the practice in the past can set no valid precedent. Such a practice has
no legal basis. Lastly, R.A. No. 6952 does not authorize oil companies to offset their claims
against their OPSF contributions. Instead, it prohibits the government from paying any amount
from the Petroleum Price Standby Fund to oil companies which have outstanding obligations with
the government, without said obligation being offset first subject to the rules on compensation in
the Civil Code.

WHEREFORE, in view of the foregoing, judgment is hereby rendered AFFIRMING the


challenged decision of the Commission on Audit, except that portion thereof disallowing
petitioner's claim for reimbursement of underrecovery arising from sales to the National Power
Corporation, which is hereby allowed.

With costs against petitioner.

SO ORDERED.

Narvasa, C.J., Melencio-Herrera, Gutierrez, Jr., Paras, Feliciano, Padilla, Bidin, Griño-Aquino,
Medialdea, Regalado, Romero and Nocon, JJ., con

Today is Thursday, August 09, 2018


Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 124043 October 14, 1998

COMMISSIONER OF INTERNAL REVENUE, petitioner,


vs.
COURT OF APPEALS, COURT OF TAX APPEALS and YOUNG MEN'S CHRISTIAN
ASSOCIATION OF THE PHILIPPINES, INC., respondents.

PANGANIBAN, J.:

Is the income derived from rentals of real property owned by the Young Men's Christian
Association of the Philippines, Inc. (YMCA) — established as "a welfare, educational and
charitable non-profit corporation" — subject to income tax under the National Internal Revenue
Code (NIRC) and the Constitution?

The Case

This is the main question raised before us in this petition for review on certiorari challenging two
Resolutions issued by the Court of Appeals1 on September 28, 19952 and February 29, 19963 in
CA-GR SP No. 32007. Both Resolutions affirmed the Decision of the Court of Tax Appeals (CTA)
allowing the YMCA to claim tax exemption on the latter's income from the lease of its real
property.

The Facts

The facts are undisputed.4 Private Respondent YMCA is a non-stock, non-profit institution, which
conducts various programs and activities that are beneficial to the public, especially the young
people, pursuant to its religious, educational and charitable objectives.

In 1980, private respondent earned, among others, an income of P676,829.80 from leasing out a
portion of its premises to small shop owners, like restaurants and canteen operators, and
P44,259.00 from parking fees collected from non-members. On July 2, 1984, the commissioner of
internal revenue (CIR) issued an assessment to private respondent, in the total amount of
P415,615.01 including surcharge and interest, for deficiency income tax, deficiency expanded
withholding taxes on rentals and professional fees and deficiency withholding tax on wages.
Private respondent formally protested the assessment and, as a supplement to its basic protest,
filed a letter dated October 8, 1985. In reply, the CIR denied the claims of YMCA.

Contesting the denial of its protest, the YMCA filed a petition for review at the Court of Tax
Appeals (CTA) on March 14, 1989. In due course, the CTA issued this ruling in favor of the
YMCA:

. . . [T]he leasing of [private respondent's] facilities to small shop owners, to restaurant and
canteen operators and the operation of the parking lot are reasonably incidental to and reasonably
necessary for the accomplishment of the objectives of the [private respondents]. It appears from
the testimonies of the witnesses for the [private respondent] particularly Mr. James C. Delote,
former accountant of YMCA, that these facilities were leased to members and that they have to
service the needs of its members and their guests. The rentals were minimal as for example, the
barbershop was only charged P300 per month. He also testified that there was actually no lot
devoted for parking space but the parking was done at the sides of the building. The parking was
primarily for members with stickers on the windshields of their cars and they charged P.50 for
non-members. The rentals and parking fees were just enough to cover the costs of operation and
maintenance only. The earning[s] from these rentals and parking charges including those from
lodging and other charges for the use of the recreational facilities constitute [the] bulk of its
income which [is] channeled to support its many activities and attainment of its objectives. As
pointed out earlier, the membership dues are very insufficient to support its program. We find it
reasonably necessary therefore for [private respondent] to make [the] most out [of] its existing
facilities to earn some income. It would have been different if under the circumstances, [private
respondent] will purchase a lot and convert it to a parking lot to cater to the needs of the general
public for a fee, or construct a building and lease it out to the highest bidder or at the market rate
for commercial purposes, or should it invest its funds in the buy and sell of properties, real or
personal. Under these circumstances, we could conclude that the activities are already profit
oriented, not incidental and reasonably necessary to the pursuit of the objectives of the association
and therefore, will fall under the last paragraph of Section 27 of the Tax Code and any income
derived therefrom shall be taxable.

Considering our findings that [private respondent] was not engaged in the business of operating or
contracting [a] parking lot, we find no legal basis also for the imposition of [a] deficiency fixed
tax and [a] contractor's tax in the amount[s] of P353.15 and P3,129.73, respectively.

xxx xxx xxx

WHEREFORE, in view of all the foregoing, the following assessments are hereby dismissed for
lack of merit:

1980 Deficiency Fixed Tax — P353,15;

1980 Deficiency Contractor's Tax — P3,129.23;


1980 Deficiency Income Tax — P372,578.20.

While the following assessments are hereby sustained:

1980 Deficiency Expanded Withholding Tax — P1,798.93;

1980 Deficiency Withholding Tax on Wages — P33,058.82

plus 10% surcharge and 20% interest per annum from July 2, 1984 until fully paid but not to
exceed three (3) years pursuant to Section 51(e)(2) & (3) of the National Internal Revenue Code
effective as of 1984. 5

Dissatisfied with the CTA ruling, the CIR elevated the case to the Court of Appeals (CA). In its
Decision of February 16, 1994, the CA6 initially decided in favor of the CIR and disposed of the
appeal in the following manner:

Following the ruling in the afore-cited cases of Province of Abra vs. Hernando and Abra Valley
College Inc. vs. Aquino, the ruling of the respondent Court of Tax Appeals that "the leasing of
petitioner's (herein respondent's) facilities to small shop owners, to restaurant and canteen
operators and the operation of the parking lot are reasonably incidental to and reasonably
necessary for the accomplishment of the objectives of the petitioners, and the income derived
therefrom are tax exempt, must be reversed.

WHEREFORE, the appealed decision is hereby REVERSED in so far as it dismissed the


assessment for:

1980 Deficiency Income Tax P 353.15

1980 Deficiency Contractor's Tax P 3,129.23, &

1980 Deficiency Income Tax P 372,578.20

but the same is AFFIRMED in all other respect. 7

Aggrieved, the YMCA asked for reconsideration based on the following grounds:

The findings of facts of the Public Respondent Court of Tax Appeals being supported by
substantial evidence [are] final and conclusive.

II

The conclusions of law of [p]ublic [r]espondent exempting [p]rivate [r]espondent from the income
on rentals of small shops and parking fees [are] in accord with the applicable law and
jurisprudence. 8

Finding merit in the Motion for Reconsideration filed by the YMCA, the CA reversed itself and
promulgated on September 28, 1995 its first assailed Resolution which, in part, reads:

The Court cannot depart from the CTA's findings of fact, as they are supported by evidence
beyond what is considered as substantial.

xxx xxx xxx

The second ground raised is that the respondent CTA did not err in saying that the rental from
small shops and parking fees do not result in the loss of the exemption. Not even the petitioner
would hazard the suggestion that YMCA is designed for profit. Consequently, the little income
from small shops and parking fees help[s] to keep its head above the water, so to speak, and allow
it to continue with its laudable work.

The Court, therefore, finds the second ground of the motion to be meritorious and in accord with
law and jurisprudence.

WHEREFORE, the motion for reconsideration is GRANTED; the respondent CTA's decision is
AFFIRMED in toto.9

The internal revenue commissioner's own Motion for Reconsideration was denied by Respondent
Court in its second assailed Resolution of February 29, 1996. Hence, this petition for review under
Rule 45 of the Rules of Court. 10

The Issues

Before us, petitioner imputes to the Court of Appeals the following errors:

In holding that it had departed from the findings of fact of Respondent Court of Tax Appeals when
it rendered its Decision dated February 16, 1994; and

II

In affirming the conclusion of Respondent Court of Tax Appeals that the income of private
respondent from rentals of small shops and parking fees [is] exempt from taxation. 11

This Court's Ruling

The petition is meritorious.


First Issue:
Factual Findings of the CTA

Private respondent contends that the February 16, 1994 CA Decision reversed the factual findings
of the CTA. On the other hand, petitioner argues that the CA merely reversed the "ruling of the
CTA that the leasing of private respondent's facilities to small shop owners, to restaurant and
canteen operators and the operation of parking lots are reasonably incidental to and reasonably
necessary for the accomplishment of the objectives of the private respondent and that the income
derived therefrom are tax exempt." 12 Petitioner insists that what the appellate court reversed was
the legal conclusion, not the factual finding, of the CTA. 13 The commissioner has a point.

Indeed, it is a basic rule in taxation that the factual findings of the CTA, when supported by
substantial evidence, will be disturbed on appeal unless it is shown that the said court committed
gross error in the appreciation of facts. 14 In the present case, this Court finds that the February
16, 1994 Decision of the CA did not deviate from this rule. The latter merely applied the law to the
facts as found by the CTA and ruled on the issue raised by the CIR: "Whether or not the collection
or earnings of rental income from the lease of certain premises and income earned from parking
fees shall fall under the last paragraph of Section 27 of the National Internal Revenue Code of
1977, as amended." 15

Clearly, the CA did not alter any fact or evidence. It merely resolved the aforementioned issue, as
indeed it was expected to. That it did so in a manner different from that of the CTA did not
necessarily imply a reversal of factual findings.

The distinction between a question of law and a question of fact is clear-cut. It has been held that
"[t]here is a question of law in a given case when the doubt or difference arises as to what the law
is on a certain state of facts; there is a question of fact when the doubt or difference arises as to the
truth or falsehood of alleged facts." 16 In the present case, the CA did not doubt, much less
change, the facts narrated by the CTA. It merely applied the law to the facts. That its interpretation
or conclusion is different from that of the CTA is not irregular or abnormal.

Second Issue:
Is the Rental Income of the YMCA Taxable?

We now come to the crucial issue: Is the rental income of the YMCA from its real estate subject to
tax? At the outset, we set forth the relevant provision of the NIRC:

Sec. 27. Exemptions from tax on corporations. — The following organizations shall not be taxed
under this Title in respect to income received by them as such —

xxx xxx xxx

(g) Civic league or organization not organized for profit but operated exclusively for the
promotion of social welfare;

(h) Club organized and operated exclusively for pleasure, recreation, and other non-profitable
purposes, no part of the net income of which inures to the benefit of any private stockholder or
member;

xxx xxx xxx

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and
character of the foregoing organizations from any of their properties, real or personal, or from any
of their activities conducted for profit, regardless of the disposition made of such income, shall be
subject to the tax imposed under this Code. (as amended by Pres. Decree No. 1457)

Petitioner argues that while the income received by the organizations enumerated in Section 27
(now Section 26) of the NIRC is, as a rule, exempted from the payment of tax "in respect to
income received by them as such," the exemption does not apply to income derived ". . . from any
of their properties, real or personal, or from any of their activities conducted for profit, regardless
of the disposition made of such income . . . ."

Petitioner adds that "rental income derived by a tax-exempt organization from the lease of its
properties, real or personal, [is] not, therefore, exempt from income taxation, even if such income
[is] exclusively used for the accomplishment of its objectives." 17 We agree with the
commissioner.

Because taxes are the lifeblood of the nation, the Court has always applied the doctrine of strict in
interpretation in construing tax exemptions. 18 Furthermore, a claim of statutory exemption from
taxation should be manifest. and unmistakable from the language of the law on which it is based.
Thus, the claimed exemption "must expressly be granted in a statute stated in a language too clear
to be mistaken." 19

In the instant case, the exemption claimed by the YMCA is expressly disallowed by the very
wording of the last paragraph of then Section 27 of the NIRC which mandates that the income of
exempt organizations (such as the YMCA) from any of their properties, real or personal, be
subject to the tax imposed by the same Code. Because the last paragraph of said section
unequivocally subjects to tax the rent income of the YMCA from its real property, 20 the Court is
duty-bound to abide strictly by its literal meaning and to refrain from resorting to any convoluted
attempt at construction.

It is axiomatic that where the language of the law is clear and unambiguous, its express terms must
be applied. 21 Parenthetically, a consideration of the question of construction must not even begin,
particularly when such question is on whether to apply a strict construction or a liberal one on
statutes that grant tax exemptions to "religious, charitable and educational propert[ies] or
institutions." 22
The last paragraph of Section 27, the YMCA argues, should be "subject to the qualification that
the income from the properties must arise from activities 'conducted for profit' before it may be
considered taxable." 23 This argument is erroneous. As previously stated, a reading of said
paragraph ineludibly shows that the income from any property of exempt organizations, as well as
that arising from any activity it conducts for profit, is taxable. The phrase "any of their activities
conducted for profit" does not qualify the word "properties." This makes from the property of the
organization taxable, regardless of how that income is used — whether for profit or for lofty non-
profit purposes.

Verba legis non est recedendum. Hence, Respondent Court of Appeals committed reversible error
when it allowed, on reconsideration, the tax exemption claimed by YMCA on income it derived
from renting out its real property, on the solitary but unconvincing ground that the said income is
not collected for profit but is merely incidental to its operation. The law does not make a
distinction. The rental income is taxable regardless of whence such income is derived and how it is
used or disposed of. Where the law does not distinguish, neither should we.

Constitutional Provisions

On Taxation

Invoking not only the NIRC but also the fundamental law, private respondent submits that Article
VI, Section 28 of par. 3 of the 1987 Constitution, 24 exempts "charitable institutions" from the
payment not only of property taxes but also of income tax from any source. 25 In support of its
novel theory, it compares the use of the words "charitable institutions," "actually" and "directly" in
the 1973 and the 1987 Constitutions, on the one hand; and in Article VI, Section 22, par. 3 of the
1935 Constitution, on the other hand. 26

Private respondent enunciates three points. First, the present provision is divisible into two
categories: (1) "[c]haritable institutions, churches and parsonages or convents appurtenant thereto,
mosques and non-profit cemeteries," the incomes of which are, from whatever source, all tax-
exempt; 27 and (2) "[a]ll lands, buildings and improvements actually and directly used for
religious, charitable or educational purposes," which are exempt only from property taxes. 28
Second, Lladoc v. Commissioner of Internal Revenue, 29 which limited the exemption only to the
payment of property taxes, referred to the provision of the 1935 Constitution and not to its
counterparts in the 1973 and the 1987 Constitutions. 30 Third, the phrase "actually, directly and
exclusively used for religious, charitable or educational purposes" refers not only to "all lands,
buildings and improvements," but also to the above-quoted first category which includes
charitable institutions like the private respondent. 31

The Court is not persuaded. The debates, interpellations and expressions of opinion of the framers
of the Constitution reveal their intent which, in turn, may have guided the people in ratifying the
Charter. 32 Such intent must be effectuated.

Accordingly, Justice Hilario G. Davide, Jr., a former constitutional commissioner, who is now a
member of this Court, stressed during the Concom debates that ". . . what is exempted is not the
institution itself . . .; those exempted from real estate taxes are lands, buildings and improvements
actually, directly and exclusively used for religious, charitable or educational
purposes." 33 Father Joaquin G. Bernas, an eminent authority on the Constitution and also a
member of the Concom, adhered to the same view that the exemption created by said provision
pertained only to property taxes. 34

In his treatise on taxation, Mr. Justice Jose C. Vitug concurs, stating that "[t]he tax exemption
covers property taxes only." 35 Indeed, the income tax exemption claimed by private respondent
finds no basis in Article VI, Section 26, par. 3 of the Constitution.

Private respondent also invokes Article XIV, Section 4, par. 3 of the Character, 36 claiming that
the YMCA "is a non-stock, non-profit educational institution whose revenues and assets are used
actually, directly and exclusively for educational purposes so it is exempt from taxes on its
properties and income." 37 We reiterate that private respondent is exempt from the payment of
property tax, but not income tax on the rentals from its property. The bare allegation alone that it is
a non-stock, non-profit educational institution is insufficient to justify its exemption from the
payment of income tax.

As previously discussed, laws allowing tax exemption are construed strictissimi juris. Hence, for
the YMCA to be granted the exemption it claims under the aforecited provision, it must prove with
substantial evidence that (1) it falls under the classification non-stock, non-profit educational
institution; and (2) the income it seeks to be exempted from taxation is used actually, directly, and
exclusively for educational purposes. However, the Court notes that not a scintilla of evidence was
submitted by private respondent to prove that it met the said requisites.

Is the YMCA an educational institution within the purview of Article XIV, Section 4, par. 3 of the
Constitution? We rule that it is not. The term "educational institution" or "institution of learning"
has acquired a well-known technical meaning, of which the members of the Constitutional
Commission are deemed cognizant. 38 Under the Education Act of 1982, such term refers to
schools. 39 The school system is synonymous with formal education, 40 which "refers to the
hierarchically structured and chronologically graded learnings organized and provided by the
formal school system and for which certification is required in order for the learner to progress
through the grades or move to the higher levels." 41 The Court has examined the "Amended
Articles of Incorporation" and "By-Laws"43 of the YMCA, but found nothing in them that even
hints that it is a school or an educational institution. 44

Furthermore, under the Education Act of 1982, even non-formal education is understood to be
school-based and "private auspices such as foundations and civic-spirited organizations" are ruled
out. 45 It is settled that the term "educational institution," when used in laws granting tax
exemptions, refers to a ". . . school seminary, college or educational establishment . . . ." 46
Therefore, the private respondent cannot be deemed one of the educational institutions covered by
the constitutional provision under consideration.
. . . Words used in the Constitution are to be taken in their ordinary acceptation. While in its
broadest and best sense education embraces all forms and phases of instruction, improvement and
development of mind and body, and as well of religious and moral sentiments, yet in the common
understanding and application it means a place where systematic instruction in any or all of the
useful branches of learning is given by methods common to schools and institutions of learning.
That we conceive to be the true intent and scope of the term [educational institutions,] as used in
the
Constitution. 47

Moreover, without conceding that Private Respondent YMCA is an educational institution, the
Court also notes that the former did not submit proof of the proportionate amount of the subject
income that was actually, directly and exclusively used for educational purposes. Article XIII,
Section 5 of the YMCA by-laws, which formed part of the evidence submitted, is patently
insufficient, since the same merely signified that "[t]he net income derived from the rentals of the
commercial buildings shall be apportioned to the Federation and Member Associations as the
National Board may decide." 48 In sum, we find no basis for granting the YMCA exemption from
income tax under the constitutional provision invoked.

Cases Cited by Private

Respondent Inapplicable

The cases 49 relied on by private respondent do not support its cause. YMCA of Manila v.
Collector of Internal Revenue 50 and Abra Valley College, Inc. v. Aquino 51 are not applicable,
because the controversy in both cases involved exemption from the payment of property tax, not
income tax. Hospital de San Juan de Dios, Inc. v. Pasay City 52 is not in point either, because it
involves a claim for exemption from the payment of regulatory fees, specifically electrical
inspection fees, imposed by an ordinance of Pasay City — an issue not at all related to that
involved in a claimed exemption from the payment of income taxes imposed on property leases. In
Jesus Sacred Heart College v. Com. of Internal Revenue, 53 the party therein, which claimed an
exemption from the payment of income tax, was an educational institution which submitted
substantial evidence that the income subject of the controversy had been devoted or used solely
for educational purposes. On the other hand, the private respondent in the present case has not
given any proof that it is an educational institution, or that part of its rent income is actually,
directly and exclusively used for educational purposes.

Epilogue

In deliberating on this petition, the Court expresses its sympathy with private respondent. It
appreciates the nobility of its cause. However, the Court's power and function are limited merely
to applying the law fairly and objectively. It cannot change the law or bend it to suit its sympathies
and appreciations. Otherwise, it would be overspilling its role and invading the realm of
legislation.
We concede that private respondent deserves the help and the encouragement of the government.
It needs laws that can facilitate, and not frustrate, its humanitarian tasks. But the Court regrets that,
given its limited constitutional authority, it cannot rule on the wisdom or propriety of legislation.
That prerogative belongs to the political departments of government. Indeed, some of the
members of the Court may even believe in the wisdom and prudence of granting more tax
exemptions to private respondent. But such belief, however well-meaning and sincere, cannot
bestow upon the Court the power to change or amend the law.

WHEREFORE, the petition is GRANTED. The Resolutions of the Court of Appeals dated
September 28, 1995 and February 29, 1996 are hereby REVERSED and SET ASIDE. The
Decision of the Court of Appeals dated February 16, 1995 is REINSTATED, insofar as it ruled
that the income derived by petitioner from rentals of its real property is subject to income tax. No
pronouncement as to costs.

SO ORDERED.

Davide, Jr., Vitug and Quisumbing, JJ., concur.

Bellosillo, J., Please see Dissenting Opinion.

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Republic of the Philippines


SUPREME COURT
Manila

EN BANC

G.R. No. L-10405 December 29, 1960

WENCESLAO PASCUAL, in his official capacity as Provincial Governor of Rizal, petitioner-


appellant,
vs.
THE SECRETARY OF PUBLIC WORKS AND COMMUNICATIONS, ET AL., respondents-
appellees.

Asst. Fiscal Noli M. Cortes and Jose P. Santos for appellant.


Office of the Asst. Solicitor General Jose G. Bautista and Solicitor A. A. Torres for appellee.
CONCEPCION, J.:

Appeal, by petitioner Wenceslao Pascual, from a decision of the Court of First Instance of Rizal,
dismissing the above entitled case and dissolving the writ of preliminary injunction therein issued,
without costs.

On August 31, 1954, petitioner Wenceslao Pascual, as Provincial Governor of Rizal, instituted this
action for declaratory relief, with injunction, upon the ground that Republic Act No. 920, entitled
"An Act Appropriating Funds for Public Works", approved on June 20, 1953, contained, in section
1-C (a) thereof, an item (43[h]) of P85,000.00 "for the construction, reconstruction, repair,
extension and improvement" of Pasig feeder road terminals (Gen. Roxas — Gen. Araneta — Gen.
Lucban — Gen. Capinpin — Gen. Segundo — Gen. Delgado — Gen. Malvar — Gen. Lim)"; that,
at the time of the passage and approval of said Act, the aforementioned feeder roads were "nothing
but projected and planned subdivision roads, not yet constructed, . . . within the Antonio
Subdivision . . . situated at . . . Pasig, Rizal" (according to the tracings attached to the petition as
Annexes A and B, near Shaw Boulevard, not far away from the intersection between the latter and
Highway 54), which projected feeder roads "do not connect any government property or any
important premises to the main highway"; that the aforementioned Antonio Subdivision (as well as
the lands on which said feeder roads were to be construed) were private properties of respondent
Jose C. Zulueta, who, at the time of the passage and approval of said Act, was a member of the
Senate of the Philippines; that on May, 1953, respondent Zulueta, addressed a letter to the
Municipal Council of Pasig, Rizal, offering to donate said projected feeder roads to the
municipality of Pasig, Rizal; that, on June 13, 1953, the offer was accepted by the council, subject
to the condition "that the donor would submit a plan of the said roads and agree to change the
names of two of them"; that no deed of donation in favor of the municipality of Pasig was,
however, executed; that on July 10, 1953, respondent Zulueta wrote another letter to said council,
calling attention to the approval of Republic Act. No. 920, and the sum of P85,000.00 appropriated
therein for the construction of the projected feeder roads in question; that the municipal council of
Pasig endorsed said letter of respondent Zulueta to the District Engineer of Rizal, who, up to the
present "has not made any endorsement thereon" that inasmuch as the projected feeder roads in
question were private property at the time of the passage and approval of Republic Act No. 920,
the appropriation of P85,000.00 therein made, for the construction, reconstruction, repair,
extension and improvement of said projected feeder roads, was illegal and, therefore, void ab
initio"; that said appropriation of P85,000.00 was made by Congress because its members were
made to believe that the projected feeder roads in question were "public roads and not private
streets of a private subdivision"'; that, "in order to give a semblance of legality, when there is
absolutely none, to the aforementioned appropriation", respondents Zulueta executed on
December 12, 1953, while he was a member of the Senate of the Philippines, an alleged deed of
donation — copy of which is annexed to the petition — of the four (4) parcels of land constituting
said projected feeder roads, in favor of the Government of the Republic of the Philippines; that
said alleged deed of donation was, on the same date, accepted by the then Executive Secretary;
that being subject to an onerous condition, said donation partook of the nature of a contract; that,
such, said donation violated the provision of our fundamental law prohibiting members of
Congress from being directly or indirectly financially interested in any contract with the
Government, and, hence, is unconstitutional, as well as null and void ab initio, for the construction
of the projected feeder roads in question with public funds would greatly enhance or increase the
value of the aforementioned subdivision of respondent Zulueta, "aside from relieving him from
the burden of constructing his subdivision streets or roads at his own expense"; that the
construction of said projected feeder roads was then being undertaken by the Bureau of Public
Highways; and that, unless restrained by the court, the respondents would continue to execute,
comply with, follow and implement the aforementioned illegal provision of law, "to the
irreparable damage, detriment and prejudice not only to the petitioner but to the Filipino nation."

Petitioner prayed, therefore, that the contested item of Republic Act No. 920 be declared null and
void; that the alleged deed of donation of the feeder roads in question be "declared
unconstitutional and, therefor, illegal"; that a writ of injunction be issued enjoining the Secretary
of Public Works and Communications, the Director of the Bureau of Public Works and Highways
and Jose C. Zulueta from ordering or allowing the continuance of the above-mentioned feeder
roads project, and from making and securing any new and further releases on the aforementioned
item of Republic Act No. 920, and the disbursing officers of the Department of Public Works and
Highways from making any further payments out of said funds provided for in Republic Act No.
920; and that pending final hearing on the merits, a writ of preliminary injunction be issued
enjoining the aforementioned parties respondent from making and securing any new and further
releases on the aforesaid item of Republic Act No. 920 and from making any further payments out
of said illegally appropriated funds.

Respondents moved to dismiss the petition upon the ground that petitioner had "no legal capacity
to sue", and that the petition did "not state a cause of action". In support to this motion, respondent
Zulueta alleged that the Provincial Fiscal of Rizal, not its provincial governor, should represent the
Province of Rizal, pursuant to section 1683 of the Revised Administrative Code; that said
respondent is " not aware of any law which makes illegal the appropriation of public funds for the
improvements of . . . private property"; and that, the constitutional provision invoked by petitioner
is inapplicable to the donation in question, the same being a pure act of liberality, not a contract.
The other respondents, in turn, maintained that petitioner could not assail the appropriation in
question because "there is no actual bona fide case . . . in which the validity of Republic Act No.
920 is necessarily involved" and petitioner "has not shown that he has a personal and substantial
interest" in said Act "and that its enforcement has caused or will cause him a direct injury."

Acting upon said motions to dismiss, the lower court rendered the aforementioned decision, dated
October 29, 1953, holding that, since public interest is involved in this case, the Provincial
Governor of Rizal and the provincial fiscal thereof who represents him therein, "have the requisite
personalities" to question the constitutionality of the disputed item of Republic Act No. 920; that
"the legislature is without power appropriate public revenues for anything but a public purpose",
that the instructions and improvement of the feeder roads in question, if such roads where private
property, would not be a public purpose; that, being subject to the following condition:

The within donation is hereby made upon the condition that the Government of the Republic of
the Philippines will use the parcels of land hereby donated for street purposes only and for no
other purposes whatsoever; it being expressly understood that should the Government of the
Republic of the Philippines violate the condition hereby imposed upon it, the title to the land
hereby donated shall, upon such violation, ipso facto revert to the DONOR, JOSE C. ZULUETA.
(Emphasis supplied.)

which is onerous, the donation in question is a contract; that said donation or contract is
"absolutely forbidden by the Constitution" and consequently "illegal", for Article 1409 of the Civil
Code of the Philippines, declares in existence and void from the very beginning contracts "whose
cause, objector purpose is contrary to law, morals . . . or public policy"; that the legality of said
donation may not be contested, however, by petitioner herein, because his "interest are not directly
affected" thereby; and that, accordingly, the appropriation in question "should be upheld" and the
case dismissed.

At the outset, it should be noted that we are concerned with a decision granting the
aforementioned motions to dismiss, which as much, are deemed to have admitted hypothetically
the allegations of fact made in the petition of appellant herein. According to said petition,
respondent Zulueta is the owner of several parcels of residential land situated in Pasig, Rizal, and
known as the Antonio Subdivision, certain portions of which had been reserved for the projected
feeder roads aforementioned, which, admittedly, were private property of said respondent when
Republic Act No. 920, appropriating P85,000.00 for the "construction, reconstruction, repair,
extension and improvement" of said roads, was passed by Congress, as well as when it was
approved by the President on June 20, 1953. The petition further alleges that the construction of
said roads, to be undertaken with the aforementioned appropriation of P85,000.00, would have the
effect of relieving respondent Zulueta of the burden of constructing his subdivision streets or roads
at his own expenses, 1and would "greatly enhance or increase the value of the subdivision" of said
respondent. The lower court held that under these circumstances, the appropriation in question was
"clearly for a private, not a public purpose."

Respondents do not deny the accuracy of this conclusion, which is self-evident. 2However,
respondent Zulueta contended, in his motion to dismiss that:

A law passed by Congress and approved by the President can never be illegal because Congress is
the source of all laws . . . Aside from the fact that movant is not aware of any law which makes
illegal the appropriation of public funds for the improvement of what we, in the meantime, may
assume as private property . . . (Record on Appeal, p. 33.)

The first proposition must be rejected most emphatically, it being inconsistent with the nature of
the Government established under the Constitution of the Republic of the Philippines and the
system of checks and balances underlying our political structure. Moreover, it is refuted by the
decisions of this Court invalidating legislative enactments deemed violative of the Constitution or
organic laws. 3

As regards the legal feasibility of appropriating public funds for a public purpose, the principle
according to Ruling Case Law, is this:
It is a general rule that the legislature is without power to appropriate public revenue for anything
but a public purpose. . . . It is the essential character of the direct object of the expenditure which
must determine its validity as justifying a tax, and not the magnitude of the interest to be affected
nor the degree to which the general advantage of the community, and thus the public welfare, may
be ultimately benefited by their promotion. Incidental to the public or to the state, which results
from the promotion of private interest and the prosperity of private enterprises or business, does
not justify their aid by the use public money. (25 R.L.C. pp. 398-400; Emphasis supplied.)

The rule is set forth in Corpus Juris Secundum in the following language:

In accordance with the rule that the taxing power must be exercised for public purposes only,
discussed supra sec. 14, money raised by taxation can be expended only for public purposes and
not for the advantage of private individuals. (85 C.J.S. pp. 645-646; emphasis supplied.)

Explaining the reason underlying said rule, Corpus Juris Secundum states:

Generally, under the express or implied provisions of the constitution, public funds may be used
only for public purpose. The right of the legislature to appropriate funds is correlative with its
right to tax, and, under constitutional provisions against taxation except for public purposes and
prohibiting the collection of a tax for one purpose and the devotion thereof to another purpose, no
appropriation of state funds can be made for other than for a public purpose.

xxx xxx xxx

The test of the constitutionality of a statute requiring the use of public funds is whether the statute
is designed to promote the public interest, as opposed to the furtherance of the advantage of
individuals, although each advantage to individuals might incidentally serve the public. (81 C.J.S.
pp. 1147; emphasis supplied.)

Needless to say, this Court is fully in accord with the foregoing views which, apart from being
patently sound, are a necessary corollary to our democratic system of government, which, as such,
exists primarily for the promotion of the general welfare. Besides, reflecting as they do, the
established jurisprudence in the United States, after whose constitutional system ours has been
patterned, said views and jurisprudence are, likewise, part and parcel of our own constitutional
law.lawphil.net

This notwithstanding, the lower court felt constrained to uphold the appropriation in question,
upon the ground that petitioner may not contest the legality of the donation above referred to
because the same does not affect him directly. This conclusion is, presumably, based upon the
following premises, namely: (1) that, if valid, said donation cured the constitutional infirmity of
the aforementioned appropriation; (2) that the latter may not be annulled without a previous
declaration of unconstitutionality of the said donation; and (3) that the rule set forth in Article
1421 of the Civil Code is absolute, and admits of no exception. We do not agree with these
premises.

The validity of a statute depends upon the powers of Congress at the time of its passage or
approval, not upon events occurring, or acts performed, subsequently thereto, unless the latter
consists of an amendment of the organic law, removing, with retrospective operation, the
constitutional limitation infringed by said statute. Referring to the P85,000.00 appropriation for
the projected feeder roads in question, the legality thereof depended upon whether said roads were
public or private property when the bill, which, latter on, became Republic Act 920, was passed by
Congress, or, when said bill was approved by the President and the disbursement of said sum
became effective, or on June 20, 1953 (see section 13 of said Act). Inasmuch as the land on which
the projected feeder roads were to be constructed belonged then to respondent Zulueta, the result
is that said appropriation sought a private purpose, and hence, was null and void. 4 The donation
to the Government, over five (5) months after the approval and effectivity of said Act, made,
according to the petition, for the purpose of giving a "semblance of legality", or legalizing, the
appropriation in question, did not cure its aforementioned basic defect. Consequently, a judicial
nullification of said donation need not precede the declaration of unconstitutionality of said
appropriation.

Again, Article 1421 of our Civil Code, like many other statutory enactments, is subject to
exceptions. For instance, the creditors of a party to an illegal contract may, under the conditions
set forth in Article 1177 of said Code, exercise the rights and actions of the latter, except only
those which are inherent in his person, including therefore, his right to the annulment of said
contract, even though such creditors are not affected by the same, except indirectly, in the manner
indicated in said legal provision.

Again, it is well-stated that the validity of a statute may be contested only by one who will sustain
a direct injury in consequence of its enforcement. Yet, there are many decisions nullifying, at the
instance of taxpayers, laws providing for the disbursement of public funds, 5upon the theory that
"the expenditure of public funds by an officer of the State for the purpose of administering an
unconstitutional act constitutes a misapplication of such funds," which may be enjoined at the
request of a taxpayer. 6Although there are some decisions to the contrary, 7the prevailing view in
the United States is stated in the American Jurisprudence as follows:

In the determination of the degree of interest essential to give the requisite standing to attack the
constitutionality of a statute, the general rule is that not only persons individually affected, but also
taxpayers, have sufficient interest in preventing the illegal expenditure of moneys raised by
taxation and may therefore question the constitutionality of statutes requiring expenditure of
public moneys. (11 Am. Jur. 761; emphasis supplied.)

However, this view was not favored by the Supreme Court of the U.S. in Frothingham vs. Mellon
(262 U.S. 447), insofar as federal laws are concerned, upon the ground that the relationship of a
taxpayer of the U.S. to its Federal Government is different from that of a taxpayer of a municipal
corporation to its government. Indeed, under the composite system of government existing in the
U.S., the states of the Union are integral part of the Federation from an international viewpoint,
but, each state enjoys internally a substantial measure of sovereignty, subject to the limitations
imposed by the Federal Constitution. In fact, the same was made by representatives of each state
of the Union, not of the people of the U.S., except insofar as the former represented the people of
the respective States, and the people of each State has, independently of that of the others, ratified
said Constitution. In other words, the Federal Constitution and the Federal statutes have become
binding upon the people of the U.S. in consequence of an act of, and, in this sense, through the
respective states of the Union of which they are citizens. The peculiar nature of the relation
between said people and the Federal Government of the U.S. is reflected in the election of its
President, who is chosen directly, not by the people of the U.S., but by electors chosen by each
State, in such manner as the legislature thereof may direct (Article II, section 2, of the Federal
Constitution).lawphi1.net

The relation between the people of the Philippines and its taxpayers, on the other hand, and the
Republic of the Philippines, on the other, is not identical to that obtaining between the people and
taxpayers of the U.S. and its Federal Government. It is closer, from a domestic viewpoint, to that
existing between the people and taxpayers of each state and the government thereof, except that
the authority of the Republic of the Philippines over the people of the Philippines is more fully
direct than that of the states of the Union, insofar as the simple and unitary type of our national
government is not subject to limitations analogous to those imposed by the Federal Constitution
upon the states of the Union, and those imposed upon the Federal Government in the interest of
the Union. For this reason, the rule recognizing the right of taxpayers to assail the constitutionality
of a legislation appropriating local or state public funds — which has been upheld by the Federal
Supreme Court (Crampton vs. Zabriskie, 101 U.S. 601) — has greater application in the
Philippines than that adopted with respect to acts of Congress of the United States appropriating
federal funds.

Indeed, in the Province of Tayabas vs. Perez (56 Phil., 257), involving the expropriation of a land
by the Province of Tayabas, two (2) taxpayers thereof were allowed to intervene for the purpose of
contesting the price being paid to the owner thereof, as unduly exorbitant. It is true that in
Custodio vs. President of the Senate (42 Off. Gaz., 1243), a taxpayer and employee of the
Government was not permitted to question the constitutionality of an appropriation for backpay of
members of Congress. However, in Rodriguez vs. Treasurer of the Philippines and Barredo vs.
Commission on Elections (84 Phil., 368; 45 Off. Gaz., 4411), we entertained the action of
taxpayers impugning the validity of certain appropriations of public funds, and invalidated the
same. Moreover, the reason that impelled this Court to take such position in said two (2) cases —
the importance of the issues therein raised — is present in the case at bar. Again, like the
petitioners in the Rodriguez and Barredo cases, petitioner herein is not merely a taxpayer. The
Province of Rizal, which he represents officially as its Provincial Governor, is our most populated
political subdivision, 8and, the taxpayers therein bear a substantial portion of the burden of
taxation, in the Philippines.

Hence, it is our considered opinion that the circumstances surrounding this case sufficiently justify
petitioners action in contesting the appropriation and donation in question; that this action should
not have been dismissed by the lower court; and that the writ of preliminary injunction should
have been maintained.

Wherefore, the decision appealed from is hereby reversed, and the records are remanded to the
lower court for further proceedings not inconsistent with this decision, with the costs of this
instance against respondent Jose C. Zulueta. It is so ordered.

Paras, C.J., Bengzon, Padilla, Bautista Angelo, Labrador, Reyes, J.B.L., Barrera, Gutierrez David,
Paredes, and Dizon, JJ., concur.

Footnotes

1 For, pursuant to section 19(h) of the existing rules and regulation of the Urban Planning
Commission, the owner of a subdivision is under obligation "to improve, repair and maintain all
streets, highways and other ways in his subdivision until their dedication to public use is accepted
by the government."

2 Ex parte Bagwell, 79 P. 2d. 395; Road District No. 4 Shelby County vs. Allred. 68 S.W 2d
164; State ex rel. Thomson vs. Giessel, 53-N.W. 2d. 726, Attorney General vs. City of Eau Claire,
37 Wis. 400; State ex rel. Smith vs. Annuity Pension Board, 241 Wis. 625, 6 N.W. 2d. 676; State
vs. Smith, 293 N.W. 161; State vs. Dammann 280 N.W. 698; Sjostrum vs. State Highway
Commission 228 P. 2d. 238; Hutton vs. Webb, 126 N.C. 897, 36 S.E. 341; Michigan Sugar Co. vs.
Auditor General, 124 Mich. 674, 83 N.W. 625; Oxnard Beet Sugar Co. vs. State, 105 N.W. 716.

3 Casanovas vs. Hord. 8 Phil., McGirr vs. Hamilton, 30 Phil., 563; Compania General de
Tabacos vs. Board of Public Utility, 34 Phil., 136; Central Capiz vs. Ramirez, 40 Phil., 883;
Concepcion vs. Paredes, 42 Phil., 599; U.S. vs. Ang Tang Ho, 43 Phil., 6; McDaniel vs. Apacible,
44 Phil., 248; People vs. Pomar, 46 Phil., 440; Agcaoili vs. Suguitan, 48 Phil., 676; Government of
P.I. vs. Springer, 50 Phil., 259; Manila Electric Co. vs. Pasay Transp. Co., 57 Phil., 600; People vs.
Linsangan, 62 Phil., 464; People and Hongkong & Shanghai Banking Corp. vs. Jose O. Vera, 65
Phil., 56; People vs. Carlos, 78 Phil., 535; 44 Off. Gaz. 428; In re Cunanan, 94 Phil., 534; 50 Off.
Gaz., 1602; City of Baguio vs. Nawasa, 106 Phil., 144; City of Cebu vs. Nawasa, 107 Phil., 1112;
Rutter vs. Esteban, 93 Phil., 68; Off. Gaz., [5]1807.

4 In the language of the Supreme Court of Nebraska, "An unconstitutional statute is a legal still
birth, which neither moves, nor breathes, nor holds out any sign of life. It is a form without one
vital spark. It is wholly dead from the time of conception, and, no right, either legal or equitable,
arises from such inanimate thing." (Oxnard Beet Sugar Co. vs. State, 102 N.W. 80.).

5 See, among others, Livermore, vs. Waite, 102 Cal. 113, 25 L.R.A. 312,36 P. 424; Crawford
vs. Gilchrist, 64 Fla. 41, 59 So. 963; Lucas vs. American Hawaiian Engineering and Constr. Co.,
16 Haw. 80; Castle vs. Capena, 5 Haw. 27; Littler vs. Jayne, 124 Ill. 123, 16 N.E. 374; Burke vs.
Snively, 208 I11. 328, 70 N.E. 372; Ellingham vs. Dye, 178 Ind. 336, 99 N.E. 1; Christmas vs.
Warfield, 105 Md. 536; Sears vs. Steel, 55 Or. 544, 107 Pac. 3; State ex rel. Taylor vs. Pennover,
26 Or. 205, 37 Pac. 906; Carman vs. Woodruf, 10 Or. 123; MacKinley vs. Watson, 145 Pac. 266;
Sears vs. James, 47 Or. 50, 82 Pac. 14; Mott vs. Pennsylvania R. Co., 30 Pa. 9, 72 Am. Dec. 664;
Bradly vs. Power County, 37 Am. Dec. 563; Frost vs. Thomas, 26 Colo. 227, 77 Am. St. Rep. 259,
56 Pac. 899; Martin vs. Ingham, 38 Kan. 641, 17 Pac. 162; Martin vs. Lacy, 39 Kan. 703, 18 Pac.
951; Smith vs. Maguerich, 44 Ga. 163; Giddings vs. Blacker, 93 Mich. 1, 16 L.R.A. 402, 52 N.W.
944; Rippe vs. Becker, 56 Minn. 100, 57 N.W. 331; Auditor vs. Treasurer, 4 S.C. 311;
McCullough vs. Brown, 31 S.C. 220, 19 S.E. 458; State ex rel. Lamb vs. Cummingham, 83 Wis.
90, 53 N.W. 35; State ex rel. Rosenhian vs. Frear, 138 Wis. 173, 119 N.W. 894.

6 Rubs vs. Thompson, 56 N.E. 2d. 761; Reid vs. Smith, 375 Ill. 147, 30N. E. 2d. 908; Fergus
vs. Russel, 270 Ill. 304, 110 N.E. 130; Burke vs. Snively, 208 Ill. 328; Jones vs. Connell, 266 Ill.
443, 107 N.E. 731; Dudick vs. Baumann, 349 [PEPSI] Ill. 46, 181 N.E. 690.

7 Thompson vs. Canal Fund Comps., 2 Abb. Pr. 248; Shieffelin vs. Komfort, 212 N.Y. 520, 106
N.E. 675; Hutchison vs. Skinmer, 21 Misc. 729, 49N. Y. Supp. 360; Long vs. Johnson, 70 Misc.
308; 127 N.Y. Supp. 756; Whiteback vs. Hooker, 73 Misc. 573, 133 N.Y. Supp. 534; State ex rel.
Cranmer vs. Thorson, 9 S.D. 149, 68 N.W. 202; Davenport vs. Elrod, 20 S.D. 567, 107 N.W. 833;
Indiana Jones vs. Reed, 3 Wash. 57, 27 Pac. 1067; Birmingham vs. Cheetham, 19 Wash. 657, 54
Pac. 37; Tacoma vs. Bridges, 25 Wash. 221, 65 Pac. 186; Hilger vs. State, 63 Wash. 457, 116 Pac.
19.

8 It has 1,463,530 inhabitants.

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Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 120082 September 11, 1996

MACTAN CEBU INTERNATIONAL AIRPORT AUTHORITY, petitioner,


vs.
HON. FERDINAND J. MARCOS, in his capacity as the Presiding Judge of the Regional Trial
Court, Branch 20, Cebu City, THE CITY OF CEBU, represented by its Mayor HON. TOMAS R.
OSMEÑA, and EUSTAQUIO B. CESA, respondents.

DAVIDE, JR., J.:

For review under Rule 45 of the Rules of Court on a pure question of law are the decision of 22
March 19951 of the Regional Trial Court (RTC) of Cebu City, Branch 20, dismissing the petition
for declaratory relief in Civil Case No. CEB-16900 entitled "Mactan Cebu International Airport
Authority vs. City of Cebu", and its order of 4, May 19952 denying the motion to reconsider the
decision.

We resolved to give due course to this petition for its raises issues dwelling on the scope of the
taxing power of local government-owned and controlled corporations.

The uncontradicted factual antecedents are summarized in the instant petition as follows:

Petitioner Mactan Cebu International Airport Authority (MCIAA) was created by virtue of
Republic Act No. 6958, mandated to "principally undertake the economical, efficient and effective
control, management and supervision of the Mactan International Airport in the Province of Cebu
and the Lahug Airport in Cebu City, . . . and such other Airports as may be established in the
Province of Cebu . . . (Sec. 3, RA 6958). It is also mandated to:

a) encourage, promote and develop international and domestic air traffic in the Central Visayas
and Mindanao regions as a means of making the regions centers of international trade and tourism,
and accelerating the development of the means of transportation and communication in the
country; and
b) upgrade the services and facilities of the airports and to formulate internationally acceptable
standards of airport accommodation and service.

Since the time of its creation, petitioner MCIAA enjoyed the privilege of exemption from payment
of realty taxes in accordance with Section 14 of its Charter.

Sec. 14. Tax Exemptions. — The authority shall be exempt from realty taxes imposed by the
National Government or any of its political subdivisions, agencies and instrumentalities . . .

On October 11, 1994, however, Mr. Eustaquio B. Cesa, Officer-in-Charge, Office of the Treasurer
of the City of Cebu, demanded payment for realty taxes on several parcels of land belonging to the
petitioner (Lot Nos. 913-G, 743, 88 SWO, 948-A, 989-A, 474, 109(931), I-M, 918, 919, 913-F,
941, 942, 947, 77 Psd., 746 and 991-A), located at Barrio Apas and Barrio Kasambagan, Lahug,
Cebu City, in the total amount of P2,229,078.79.

Petitioner objected to such demand for payment as baseless and unjustified, claiming in its favor
the aforecited Section 14 of RA 6958 which exempt it from payment of realty taxes. It was also
asserted that it is an instrumentality of the government performing governmental functions, citing
section 133 of the Local Government Code of 1991 which puts limitations on the taxing powers of
local government units:

Sec. 133. Common Limitations on the Taxing Powers of Local Government Units. — Unless
otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities,
and barangay shall not extend to the levy of the following:

a) ...

xxx xxx xxx

o) Taxes, fees or charges of any kind on the National Government, its agencies and
instrumentalities, and local government units. (Emphasis supplied)

Respondent City refused to cancel and set aside petitioner's realty tax account, insisting that the
MCIAA is a government-controlled corporation whose tax exemption privilege has been
withdrawn by virtue of Sections 193 and 234 of the Local Governmental Code that took effect on
January 1, 1992:

Sec. 193. Withdrawal of Tax Exemption Privilege. — Unless otherwise provided in this Code, tax
exemptions or incentives granted to, or presently enjoyed by all persons whether natural or
juridical, including government-owned or controlled corporations, except local water districts,
cooperatives duly registered under RA No. 6938, non-stock, and non-profit hospitals and
educational institutions, are hereby withdrawn upon the effectivity of this Code. (Emphasis
supplied)
xxx xxx xxx

Sec. 234. Exemptions from Real Property taxes. — . . .

(a) . . .

xxx xxx xxx

(c) . . .

Except as provided herein, any exemption from payment of real property tax previously granted
to, or presently enjoyed by all persons, whether natural or juridical, including government-owned
or controlled corporations are hereby withdrawn upon the effectivity of this Code.

As the City of Cebu was about to issue a warrant of levy against the properties of petitioner, the
latter was compelled to pay its tax account "under protest" and thereafter filed a Petition for
Declaratory Relief with the Regional Trial Court of Cebu, Branch 20, on December 29, 1994.
MCIAA basically contended that the taxing powers of local government units do not extend to the
levy of taxes or fees of any kind on an instrumentality of the national government. Petitioner
insisted that while it is indeed a government-owned corporation, it nonetheless stands on the same
footing as an agency or instrumentality of the national government. Petitioner insisted that while it
is indeed a government-owned corporation, it nonetheless stands on the same footing as an agency
or instrumentality of the national government by the very nature of its powers and functions.

Respondent City, however, asserted that MACIAA is not an instrumentality of the government but
merely a government-owned corporation performing proprietary functions As such, all exemptions
previously granted to it were deemed withdrawn by operation of law, as provided under Sections
193 and 234 of the Local Government Code when it took effect on January 1, 1992.3

The petition for declaratory relief was docketed as Civil Case No. CEB-16900.

In its decision of 22 March 1995,4 the trial court dismissed the petition in light of its findings, to
wit:

A close reading of the New Local Government Code of 1991 or RA 7160 provides the express
cancellation and withdrawal of exemption of taxes by government owned and controlled
corporation per Sections after the effectivity of said Code on January 1, 1992, to wit: [proceeds to
quote Sections 193 and 234]

Petitioners claimed that its real properties assessed by respondent City Government of Cebu are
exempted from paying realty taxes in view of the exemption granted under RA 6958 to pay the
same (citing Section 14 of RA 6958).

However, RA 7160 expressly provides that "All general and special laws, acts, city charters,
decress [sic], executive orders, proclamations and administrative regulations, or part or parts
thereof which are inconsistent with any of the provisions of this Code are hereby repealed or
modified accordingly." ([f], Section 534, RA 7160).

With that repealing clause in RA 7160, it is safe to infer and state that the tax exemption provided
for in RA 6958 creating petitioner had been expressly repealed by the provisions of the New Local
Government Code of 1991.

So that petitioner in this case has to pay the assessed realty tax of its properties effective after
January 1, 1992 until the present.

This Court's ruling finds expression to give impetus and meaning to the overall objectives of the
New Local Government Code of 1991, RA 7160. "It is hereby declared the policy of the State that
the territorial and political subdivisions of the State shall enjoy genuine and meaningful local
autonomy to enable them to attain their fullest development as self-reliant communities and make
them more effective partners in the attainment of national goals. Towards this end, the State shall
provide for a more responsive and accountable local government structure instituted through a
system of decentralization whereby local government units shall be given more powers, authority,
responsibilities, and resources. The process of decentralization shall proceed from the national
government to the local government units. . . .5

Its motion for reconsideration having been denied by the trial court in its 4 May 1995 order, the
petitioner filed the instant petition based on the following assignment of errors:

I RESPONDENT JUDGE ERRED IN FAILING TO RULE THAT THE PETITIONER IS


VESTED WITH GOVERNMENT POWERS AND FUNCTIONS WHICH PLACE IT IN THE
SAME CATEGORY AS AN INSTRUMENTALITY OR AGENCY OF THE GOVERNMENT.

II RESPONDENT JUDGE ERRED IN RULING THAT PETITIONER IS LIABLE TO PAY


REAL PROPERTY TAXES TO THE CITY OF CEBU.

Anent the first assigned error, the petitioner asserts that although it is a government-owned or
controlled corporation it is mandated to perform functions in the same category as an
instrumentality of Government. An instrumentality of Government is one created to perform
governmental functions primarily to promote certain aspects of the economic life of the people.6
Considering its task "not merely to efficiently operate and manage the Mactan-Cebu International
Airport, but more importantly, to carry out the Government policies of promoting and developing
the Central Visayas and Mindanao regions as centers of international trade and tourism, and
accelerating the development of the means of transportation and communication in the country,"7
and that it is an attached agency of the Department of Transportation and Communication
(DOTC),8 the petitioner "may stand in [sic] the same footing as an agency or instrumentality of
the national government." Hence, its tax exemption privilege under Section 14 of its Charter
"cannot be considered withdrawn with the passage of the Local Government Code of 1991
(hereinafter LGC) because Section 133 thereof specifically states that the taxing powers of local
government units shall not extend to the levy of taxes of fees or charges of any kind on the
national government its agencies and instrumentalities."

As to the second assigned error, the petitioner contends that being an instrumentality of the
National Government, respondent City of Cebu has no power nor authority to impose realty taxes
upon it in accordance with the aforesaid Section 133 of the LGC, as explained in Basco vs.
Philippine Amusement and Gaming Corporation;9

Local governments have no power to tax instrumentalities of the National Government. PAGCOR
is a government owned or controlled corporation with an original character, PD 1869. All its
shares of stock are owned by the National Government. . . .

PAGCOR has a dual role, to operate and regulate gambling casinos. The latter joke is
governmental, which places it in the category of an agency or instrumentality of the Government.
Being an instrumentality of the Government, PAGCOR should be and actually is exempt from
local taxes. Otherwise, its operation might be burdened, impeded or subjected to control by a mere
Local government.

The states have no power by taxation or otherwise, to retard, impede, burden or in any manner
control the operation of constitutional laws enacted by Congress to carry into execution the
powers vested in the federal government. (McCulloch v. Maryland, 4 Wheat 316, 4 L Ed. 579).

This doctrine emanates from the "supremacy" of the National Government over local government.

Justice Holmes, speaking for the Supreme Court, make references to the entire absence of power
on the part of the States to touch, in that way (taxation) at least, the instrumentalities of the United
States (Johnson v. Maryland, 254 US 51) and it can be agreed that no state or political subdivision
can regulate a federal instrumentality in such a way as to prevent it from consummating its federal
responsibilities, or even to seriously burden it in the accomplishment of them. (Antieau Modern
Constitutional Law, Vol. 2, p. 140)

Otherwise mere creature of the State can defeat National policies thru extermination of what local
authorities may perceive to be undesirable activities or enterprise using the power to tax as "a toll
for regulation" (U.S. v. Sanchez, 340 US 42). The power to tax which was called by Justice
Marshall as the "power to destroy" (McCulloch v. Maryland, supra) cannot be allowed to defeat an
instrumentality or creation of the very entity which has the inherent power to wield it. (Emphasis
supplied)

It then concludes that the respondent Judge "cannot therefore correctly say that the questioned
provisions of the Code do not contain any distinction between a governmental function as against
one performing merely proprietary ones such that the exemption privilege withdrawn under the
said Code would apply to all government corporations." For it is clear from Section 133, in
relation to Section 234, of the LGC that the legislature meant to exclude instrumentalities of the
national government from the taxing power of the local government units.
In its comment respondent City of Cebu alleges that as local a government unit and a political
subdivision, it has the power to impose, levy, assess, and collect taxes within its jurisdiction. Such
power is guaranteed by the Constitution10 and enhanced further by the LGC. While it may be true
that under its Charter the petitioner was exempt from the payment of realty taxes,11 this
exemption was withdrawn by Section 234 of the LGC. In response to the petitioner's claim that
such exemption was not repealed because being an instrumentality of the National Government,
Section 133 of the LGC prohibits local government units from imposing taxes, fees, or charges of
any kind on it, respondent City of Cebu points out that the petitioner is likewise a government-
owned corporation, and Section 234 thereof does not distinguish between government-owned
corporation, and Section 234 thereof does not distinguish between government-owned
corporation, and Section 234 thereof does not distinguish between government-owned or
controlled corporations performing governmental and purely proprietary functions. Respondent
city of Cebu urges this the Manila International Airport Authority is a governmental-owned
corporation, 12 and to reject the application of Basco because it was "promulgated . . . before the
enactment and the singing into law of R.A. No. 7160," and was not, therefore, decided "in the
light of the spirit and intention of the framers of the said law.

As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range,
acknowledging in its very nature no limits, so that security against its abuse is to be found only in
the responsibility of the legislature which imposes the tax on the constituency who are to pay it.
Nevertheless, effective limitations thereon may be imposed by the people through their
Constitutions.13 Our Constitution, for instance, provides that the rule of taxation shall be uniform
and equitable and Congress shall evolve a progressive system of taxation.14 So potent indeed is
the power that it was once opined that "the power to tax involves the power to destroy."15 Verily,
taxation is a destructive power which interferes with the personal and property for the support of
the government. Accordingly, tax statutes must be construed strictly against the government and
liberally in favor of the taxpayer.16 But since taxes are what we pay for civilized society,17 or are
the lifeblood of the nation, the law frowns against exemptions from taxation and statutes granting
tax exemptions are thus construed strictissimi juris against the taxpayers and liberally in favor of
the taxing authority.18 A claim of exemption from tax payment must be clearly shown and based
on language in the law too plain to be mistaken.19 Elsewise stated, taxation is the rule, exemption
therefrom is the exception.20 However, if the grantee of the exemption is a political subdivision or
instrumentality, the rigid rule of construction does not apply because the practical effect of the
exemption is merely to reduce the amount of money that has to be handled by the government in
the course of its operations.21

The power to tax is primarily vested in the Congress; however, in our jurisdiction, it may be
exercised by local legislative bodies, no longer merely by virtue of a valid delegation as before,
but pursuant to direct authority conferred by Section 5, Article X of the Constitution.22 Under the
latter, the exercise of the power may be subject to such guidelines and limitations as the Congress
may provide which, however, must be consistent with the basic policy of local autonomy.

There can be no question that under Section 14 of R.A. No. 6958 the petitioner is exempt from the
payment of realty taxes imposed by the National Government or any of its political subdivisions,
agencies, and instrumentalities. Nevertheless, since taxation is the rule and exemption therefrom
the exception, the exemption may thus be withdrawn at the pleasure of the taxing authority. The
only exception to this rule is where the exemption was granted to private parties based on material
consideration of a mutual nature, which then becomes contractual and is thus covered by the non-
impairment clause of the Constitution.23

The LGC, enacted pursuant to Section 3, Article X of the constitution provides for the exercise by
local government units of their power to tax, the scope thereof or its limitations, and the
exemption from taxation.

Section 133 of the LGC prescribes the common limitations on the taxing powers of local
government units as follows:

Sec. 133. Common Limitations on the Taxing Power of Local Government Units. — Unless
otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities,
and barangays shall not extend to the levy of the following:

(a) Income tax, except when levied on banks and other financial institutions;

(b) Documentary stamp tax;

(c) Taxes on estates, "inheritance, gifts, legacies and other acquisitions mortis causa, except as
otherwise provided herein

(d) Customs duties, registration fees of vessels and wharfage on wharves, tonnage dues, and all
other kinds of customs fees charges and dues except wharfage on wharves constructed and
maintained by the local government unit concerned:

(e) Taxes, fees and charges and other imposition upon goods carried into or out of, or passing
through, the territorial jurisdictions of local government units in the guise or charges for
wharfages, tolls for bridges or otherwise, or other taxes, fees or charges in any form whatsoever
upon such goods or merchandise;

(f) Taxes fees or charges on agricultural and aquatic products when sold by marginal farmers or
fishermen;

(g) Taxes on business enterprise certified to be the Board of Investment as pioneer or non-
pioneer for a period of six (6) and four (4) years, respectively from the date of registration;

(h) Excise taxes on articles enumerated under the National Internal Revenue Code, as amended,
and taxes, fees or charges on petroleum products;

(i) Percentage or value added tax (VAT) on sales, barters or exchanges or similar transactions on
goods or services except as otherwise provided herein;

(j) Taxes on the gross receipts of transportation contractor and person engage in the
transportation of passengers of freight by hire and common carriers by air, land, or water, except
as provided in this code;

(k) Taxes on premiums paid by ways reinsurance or retrocession;

(l) Taxes, fees, or charges for the registration of motor vehicles and for the issuance of all kinds
of licenses or permits for the driving of thereof, except, tricycles;

(m) Taxes, fees, or other charges on Philippine product actually exported, except as otherwise
provided herein;

(n) Taxes, fees, or charges, on Countryside and Barangay Business Enterprise and Cooperatives
duly registered under R.A. No. 6810 and Republic Act Numbered Sixty nine hundred thirty-eight
(R.A. No. 6938) otherwise known as the "Cooperative Code of the Philippines; and

(o) TAXES, FEES, OR CHARGES OF ANY KIND ON THE NATIONAL GOVERNMENT,


ITS AGENCIES AND INSTRUMENTALITIES, AND LOCAL GOVERNMENT UNITS.
(emphasis supplied)

Needless to say the last item (item o) is pertinent in this case. The "taxes, fees or charges" referred
to are "of any kind", hence they include all of these, unless otherwise provided by the LGC. The
term "taxes" is well understood so as to need no further elaboration, especially in the light of the
above enumeration. The term "fees" means charges fixed by law or Ordinance for the regulation or
inspection of business activity,24 while "charges" are pecuniary liabilities such as rents or fees
against person or property.25

Among the "taxes" enumerated in the LGC is real property tax, which is governed by Section 232.
It reads as follows:

Sec. 232. Power to Levy Real Property Tax. — A province or city or a municipality within the
Metropolitan Manila Area may levy on an annual ad valorem tax on real property such as land,
building, machinery and other improvements not hereafter specifically exempted.

Section 234 of LGC provides for the exemptions from payment of real property taxes and
withdraws previous exemptions therefrom granted to natural and juridical persons, including
government owned and controlled corporations, except as provided therein. It provides:

Sec. 234. Exemptions from Real Property Tax. — The following are exempted from payment of
the real property tax:

(a) Real property owned by the Republic of the Philippines or any of its political subdivisions
except when the beneficial use thereof had been granted, for reconsideration or otherwise, to a
taxable person;

(b) Charitable institutions, churches, parsonages or convents appurtenants thereto, mosques


nonprofits or religious cemeteries and all lands, building and improvements actually, directly, and
exclusively used for religious charitable or educational purposes;

(c) All machineries and equipment that are actually, directly and exclusively used by local water
districts and government-owned or controlled corporations engaged in the supply and distribution
of water and/or generation and transmission of electric power;

(d) All real property owned by duly registered cooperatives as provided for under R.A. No.
6938; and;

(e) Machinery and equipment used for pollution control and environmental protection.

Except as provided herein, any exemptions from payment of real property tax previously granted
to or presently enjoyed by, all persons whether natural or juridical, including all government
owned or controlled corporations are hereby withdrawn upon the effectivity of his Code.

These exemptions are based on the ownership, character, and use of the property. Thus;

(a) Ownership Exemptions. Exemptions from real property taxes on the basis of ownership are
real properties owned by: (i) the Republic, (ii) a province, (iii) a city, (iv) a municipality, (v) a
barangay, and (vi) registered cooperatives.

(b) Character Exemptions. Exempted from real property taxes on the basis of their character
are: (i) charitable institutions, (ii) houses and temples of prayer like churches, parsonages or
convents appurtenant thereto, mosques, and (iii) non profit or religious cemeteries.

(c) Usage exemptions. Exempted from real property taxes on the basis of the actual, direct and
exclusive use to which they are devoted are: (i) all lands buildings and improvements which are
actually, directed and exclusively used for religious, charitable or educational purpose; (ii) all
machineries and equipment actually, directly and exclusively used or by local water districts or by
government-owned or controlled corporations engaged in the supply and distribution of water
and/or generation and transmission of electric power; and (iii) all machinery and equipment used
for pollution control and environmental protection.

To help provide a healthy environment in the midst of the modernization of the country, all
machinery and equipment for pollution control and environmental protection may not be taxed by
local governments.

2. Other Exemptions Withdrawn. All other exemptions previously granted to natural or


juridical persons including government-owned or controlled corporations are withdrawn upon the
effectivity of the Code.26

Section 193 of the LGC is the general provision on withdrawal of tax exemption privileges. It
provides:

Sec. 193. Withdrawal of Tax Exemption Privileges. — Unless otherwise provided in this code, tax
exemptions or incentives granted to or presently enjoyed by all persons, whether natural or
juridical, including government-owned, or controlled corporations, except local water districts,
cooperatives duly registered under R.A. 6938, non stock and non profit hospitals and educational
constitutions, are hereby withdrawn upon the effectivity of this Code.

On the other hand, the LGC authorizes local government units to grant tax exemption privileges.
Thus, Section 192 thereof provides:

Sec. 192. Authority to Grant Tax Exemption Privileges. — Local government units may, through
ordinances duly approved, grant tax exemptions, incentives or reliefs under such terms and
conditions as they may deem necessary.

The foregoing sections of the LGC speaks of: (a) the limitations on the taxing powers of local
government units and the exceptions to such limitations; and (b) the rule on tax exemptions and
the exceptions thereto. The use of exceptions of provisos in these section, as shown by the
following clauses:

(1) "unless otherwise provided herein" in the opening paragraph of Section 133;

(2) "Unless otherwise provided in this Code" in section 193;

(3) "not hereafter specifically exempted" in Section 232; and

(4) "Except as provided herein" in the last paragraph of Section 234

initially hampers a ready understanding of the sections. Note, too, that the aforementioned clause
in section 133 seems to be inaccurately worded. Instead of the clause "unless otherwise provided
herein," with the "herein" to mean, of course, the section, it should have used the clause "unless
otherwise provided in this Code." The former results in absurdity since the section itself
enumerates what are beyond the taxing powers of local government units and, where exceptions
were intended, the exceptions were explicitly indicated in the text. For instance, in item (a) which
excepts the income taxes "when livied on banks and other financial institutions", item (d) which
excepts "wharfage on wharves constructed and maintained by the local government until
concerned"; and item (1) which excepts taxes, fees, and charges for the registration and issuance
of license or permits for the driving of "tricycles". It may also be observed that within the body
itself of the section, there are exceptions which can be found only in other parts of the LGC, but
the section interchangeably uses therein the clause "except as otherwise provided herein" as in
items (c) and (i), or the clause "except as otherwise provided herein" as in items (c) and (i), or the
clause "excepts as provided in this Code" in item (j). These clauses would be obviously
unnecessary or mere surplus-ages if the opening clause of the section were" "Unless otherwise
provided in this Code" instead of "Unless otherwise provided herein". In any event, even if the
latter is used, since under Section 232 local government units have the power to levy real property
tax, except those exempted therefrom under Section 234, then Section 232 must be deemed to
qualify Section 133.

Thus, reading together Section 133, 232 and 234 of the LGC, we conclude that as a general rule,
as laid down in Section 133 the taxing powers of local government units cannot extend to the levy
of inter alia, "taxes, fees, and charges of any kind of the National Government, its agencies and
instrumentalties, and local government units"; however, pursuant to Section 232, provinces, cities,
municipalities in the Metropolitan Manila Area may impose the real property tax except on, inter
alia, "real property owned by the Republic of the Philippines or any of its political subdivisions
except when the beneficial used thereof has been granted, for consideration or otherwise, to a
taxable person", as provided in item (a) of the first paragraph of Section 234.

As to tax exemptions or incentives granted to or presently enjoyed by natural or juridical persons,


including government-owned and controlled corporations, Section 193 of the LGC prescribes the
general rule, viz., they are withdrawn upon the effectivity of the LGC, except upon the effectivity
of the LGC, except those granted to local water districts, cooperatives duly registered under R.A.
No. 6938, non stock and non-profit hospitals and educational institutions, and unless otherwise
provided in the LGC. The latter proviso could refer to Section 234, which enumerates the
properties exempt from real property tax. But the last paragraph of Section 234 further qualifies
the retention of the exemption in so far as the real property taxes are concerned by limiting the
retention only to those enumerated there-in; all others not included in the enumeration lost the
privilege upon the effectivity of the LGC. Moreover, even as the real property is owned by the
Republic of the Philippines, or any of its political subdivisions covered by item (a) of the first
paragraph of Section 234, the exemption is withdrawn if the beneficial use of such property has
been granted to taxable person for consideration or otherwise.

Since the last paragraph of Section 234 unequivocally withdrew, upon the effectivity of the LGC,
exemptions from real property taxes granted to natural or juridical persons, including government-
owned or controlled corporations, except as provided in the said section, and the petitioner is,
undoubtedly, a government-owned corporation, it necessarily follows that its exemption from such
tax granted it in Section 14 of its charter, R.A. No. 6958, has been withdrawn. Any claim to the
contrary can only be justified if the petitioner can seek refuge under any of the exceptions
provided in Section 234, but not under Section 133, as it now asserts, since, as shown above, the
said section is qualified by Section 232 and 234.

In short, the petitioner can no longer invoke the general rule in Section 133 that the taxing powers
of the local government units cannot extend to the levy of:

(o) taxes, fees, or charges of any kind on the National Government, its agencies, or
instrumentalities, and local government units.
I must show that the parcels of land in question, which are real property, are any one of those
enumerated in Section 234, either by virtue of ownership, character, or use of the property. Most
likely, it could only be the first, but not under any explicit provision of the said section, for one
exists. In light of the petitioner's theory that it is an "instrumentality of the Government", it could
only be within be first item of the first paragraph of the section by expanding the scope of the
terms Republic of the Philippines" to embrace . . . . . . "instrumentalities" and "agencies" or
expediency we quote:

(a) real property owned by the Republic of the Philippines, or any of the Philippines, or any of
its political subdivisions except when the beneficial use thereof has been granted, for
consideration or otherwise, to a taxable person.

This view does not persuade us. In the first place, the petitioner's claim that it is an instrumentality
of the Government is based on Section 133(o), which expressly mentions the word
"instrumentalities"; and in the second place it fails to consider the fact that the legislature used the
phrase "National Government, its agencies and instrumentalities" "in Section 133(o),but only the
phrase "Republic of the Philippines or any of its political subdivision "in Section 234(a).

The terms "Republic of the Philippines" and "National Government" are not interchangeable. The
former is boarder and synonymous with "Government of the Republic of the Philippines" which
the Administrative Code of the 1987 defines as the "corporate governmental entity though which
the functions of the government are exercised through at the Philippines, including, saves as the
contrary appears from the context, the various arms through which political authority is made
effective in the Philippines, whether pertaining to the autonomous reason, the provincial, city,
municipal or barangay subdivision or other forms of local government."27 These autonomous
regions, provincial, city, municipal or barangay subdivisions" are the political subdivision.28

On the other hand, "National Government" refers "to the entire machinery of the central
government, as distinguished from the different forms of local Governments."29 The National
Government then is composed of the three great departments the executive, the legislative and the
judicial.30

An "agency" of the Government refers to "any of the various units of the Government, including a
department, bureau, office instrumentality, or government-owned or controlled corporation, or a
local government or a distinct unit therein;"31 while an "instrumentality" refers to "any agency of
the National Government, not integrated within the department framework, vested with special
functions or jurisdiction by law, endowed with some if not all corporate powers, administering
special funds, and enjoying operational autonomy; usually through a charter. This term includes
regulatory agencies, chartered institutions and government-owned and controlled corporations".32

If Section 234(a) intended to extend the exception therein to the withdrawal of the exemption from
payment of real property taxes under the last sentence of the said section to the agencies and
instrumentalities of the National Government mentioned in Section 133(o), then it should have
restated the wording of the latter. Yet, it did not Moreover, that Congress did not wish to expand
the scope of the exemption in Section 234(a) to include real property owned by other
instrumentalities or agencies of the government including government-owned and controlled
corporations is further borne out by the fact that the source of this exemption is Section 40(a) of
P.D. No. 646, otherwise known as the Real Property Tax Code, which reads:

Sec 40. Exemption from Real Property Tax. — The exemption shall be as follows:

(a) Real property owned by the Republic of the Philippines or any of its political subdivisions
and any government-owned or controlled corporations so exempt by is charter: Provided,
however, that this exemption shall not apply to real property of the above mentioned entities the
beneficial use of which has been granted, for consideration or otherwise, to a taxable person.

Note that as a reproduced in Section 234(a), the phrase "and any government-owned or controlled
corporation so exempt by its charter" was excluded. The justification for this restricted exemption
in Section 234(a) seems obvious: to limit further tax exemption privileges, specially in light of the
general provision on withdrawal of exemption from payment of real property taxes in the last
paragraph of property taxes in the last paragraph of Section 234. These policy considerations are
consistent with the State policy to ensure autonomy to local governments33 and the objective of
the LGC that they enjoy genuine and meaningful local autonomy to enable them to attain their
fullest development as self-reliant communities and make them effective partners in the attainment
of national goals.34 The power to tax is the most effective instrument to raise needed revenues to
finance and support myriad activities of local government units for the delivery of basic services
essential to the promotion of the general welfare and the enhancement of peace, progress, and
prosperity of the people. It may also be relevant to recall that the original reasons for the
withdrawal of tax exemption privileges granted to government-owned and controlled corporations
and all other units of government were that such privilege resulted in serious tax base erosion and
distortions in the tax treatment of similarly situated enterprises, and there was a need for this
entities to share in the requirements of the development, fiscal or otherwise, by paying the taxes
and other charges due from them.35

The crucial issues then to be addressed are: (a) whether the parcels of land in question belong to
the Republic of the Philippines whose beneficial use has been granted to the petitioner, and (b)
whether the petitioner is a "taxable person".

Section 15 of the petitioner's Charter provides:

Sec. 15. Transfer of Existing Facilities and Intangible Assets. — All existing public airport
facilities, runways, lands, buildings and other properties, movable or immovable, belonging to or
presently administered by the airports, and all assets, powers, rights, interests and privileges
relating on airport works, or air operations, including all equipment which are necessary for the
operations of air navigation, acrodrome control towers, crash, fire, and rescue facilities are hereby
transferred to the Authority: Provided however, that the operations control of all equipment
necessary for the operation of radio aids to air navigation, airways communication, the approach
control office, and the area control center shall be retained by the Air Transportation Office. No
equipment, however, shall be removed by the Air Transportation Office from Mactan without the
concurrence of the authority. The authority may assist in the maintenance of the Air Transportation
Office equipment.

The "airports" referred to are the "Lahug Air Port" in Cebu City and the "Mactan International
AirPort in the Province of Cebu",36 which belonged to the Republic of the Philippines, then under
the Air Transportation Office (ATO).37

It may be reasonable to assume that the term "lands" refer to "lands" in Cebu City then
administered by the Lahug Air Port and includes the parcels of land the respondent City of Cebu
seeks to levy on for real property taxes. This section involves a "transfer" of the "lands" among
other things, to the petitioner and not just the transfer of the beneficial use thereof, with the
ownership being retained by the Republic of the Philippines.

This "transfer" is actually an absolute conveyance of the ownership thereof because the
petitioner's authorized capital stock consists of, inter alia "the value of such real estate owned
and/or administered by the airports."38 Hence, the petitioner is now the owner of the land in
question and the exception in Section 234(c) of the LGC is inapplicable.

Moreover, the petitioner cannot claim that it was never a "taxable person" under its Charter. It was
only exempted from the payment of real property taxes. The grant of the privilege only in respect
of this tax is conclusive proof of the legislative intent to make it a taxable person subject to all
taxes, except real property tax.

Finally, even if the petitioner was originally not a taxable person for purposes of real property tax,
in light of the forgoing disquisitions, it had already become even if it be conceded to be an
"agency" or "instrumentality" of the Government, a taxable person for such purpose in view of the
withdrawal in the last paragraph of Section 234 of exemptions from the payment of real property
taxes, which, as earlier adverted to, applies to the petitioner.

Accordingly, the position taken by the petitioner is untenable. Reliance on Basco vs. Philippine
Amusement and Gaming Corporation39 is unavailing since it was decided before the effectivity of
the LGC. Besides, nothing can prevent Congress from decreeing that even instrumentalities or
agencies of the government performing governmental functions may be subject to tax. Where it is
done precisely to fulfill a constitutional mandate and national policy, no one can doubt its wisdom.

WHEREFORE, the instant petition is DENIED. The challenged decision and order of the
Regional Trial Court of Cebu, Branch 20, in Civil Case No. CEB-16900 are AFFIRMED.

No pronouncement as to costs.

SO ORDERED.
Narvasa, C.J., Melo, Francisco and Panganiban, JJ., concur.

Footnotes

1 Rollo, 27-29. Per Judge Ferdinand J. Marcos.

2 Id., 30-31.

3 Rollo, 10-13.

4 Supra note 1.

5 Rollo, 28-29.

6 Citing Gonzales vs. Hechanova, 118 Phil. 1065 [1963].

7 Citing Section 3, R.A. No. 6958.

8 Citing Section 2, Id.

9 197 SCRA 52 [1991].

10 Section 5, Article X, 1987 Constitution.

11 Section 14, R.A. No. 6958.

12 Manila International Airport Authority (MIAA) vs. Commission on Audit, 238 SCRA 714
[1994].

13 COOLEY on Constitutional Law, 4th ed. [1931], 62.

14 Section 28(1), Article VI, 1987 Constitution.

15 Chief Justice Marshall in McCulloch vs. Maryland, 4 Wheat, 316, 4 L. ed. 579, 607. Later
Justice Holmes brushed this aside by declaring in Panhandle Oil Co. vs. Mississippi (277 U.S.
218) that "the power to tax is not the power to destroy while this Court sits." Justice Frankfurter in
Graves vs. New York (306 U.S. 466) also remarked that Justice Marshall's statement was a "mere
flourish of rhetoric" and a product of the "intellectual fashion of the times to indulge in a free case
of absolutes." (See SINCO, Philippine Political Law [1954], 577-578).

16 AGPALO, RUBEN E., Statutory Construction [1990 ed], 216. See also SANDS, DALLAS
C., Statutes and Statutory Construction, vol. 3 [1974] 179.

17 Justice Holmes in his dissent in Compania General vs. Collector of Internal Revenue, 275
U.S. 87, 100[1927].

18 AGPALO, op. cit., 217 SANDS, op. cit., 207.

19 SINCO, op. cit., 587.

20 SANDS, op. cit., 207

21 Maceda vs. Macaraig, Jr. 197 SCRA 771, 799 [1991]; citing 2 COOLEY on the Law on
Taxation, 4th ed. [1927], 1414, and SANDS, op. cit., 207.

22 CRUZ, ISAGANI, Constitutional Law [1991], 84.

23 Id., 91-92; SINCO, op. cit., 587.

24 Section 131(l), Local Government Code of 1991.

25 Section 131(g), id.

26 PIMENTEL, AQUILINO JR., The Local Government Code of 1991 — The Key to National
Development [1933], 329.

27 Section 2(1), Introductory Provisions, Administrative Code of 1987.

28 Section 1, Article X, 1987 Constitution.

29 Section 2(2), Introductory Provisions, Administrative Code of 1987.

30 Bacani vs. National Coconut Corporation, 100 Phil. 468, 472 [1956].

31 Section 2(4), Introductory Provisions, Administrative Code of 1987.

32 Section 2(10), Id., Id.

33 Section 25, Article II, and Section 2, Article X, Constitution.

34 Section 2(a), Local Government Code of 1991

Today is Thursday, August 09, 2018

Custom Search
Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-41631 December 17, 1976

HON. RAMON D. BAGATSING, as Mayor of the City of Manila; ROMAN G. GARGANTIEL,


as Secretary to the Mayor; THE MARKET ADMINISTRATOR; and THE MUNICIPAL BOARD
OF MANILA, petitioners,
vs.
HON. PEDRO A. RAMIREZ, in his capacity as Presiding Judge of the Court of First Instance of
Manila, Branch XXX and the FEDERATION OF MANILA MARKET VENDORS, INC.,
respondents.

Santiago F. Alidio and Restituto R. Villanueva for petitioners.

Antonio H. Abad, Jr. for private respondent.

Federico A. Blay for petitioner for intervention.

MARTIN, J.:

The chief question to be decided in this case is what law shall govern the publication of a tax
ordinance enacted by the Municipal Board of Manila, the Revised City Charter (R.A. 409, as
amended), which requires publication of the ordinance before its enactment and after its approval,
or the Local Tax Code (P.D. No. 231), which only demands publication after approval.

On June 12, 1974, the Municipal Board of Manila enacted Ordinance No. 7522, "AN
ORDINANCE REGULATING THE OPERATION OF PUBLIC MARKETS AND
PRESCRIBING FEES FOR THE RENTALS OF STALLS AND PROVIDING PENALTIES FOR
VIOLATION THEREOF AND FOR OTHER PURPOSES." The petitioner City Mayor, Ramon D.
Bagatsing, approved the ordinance on June 15, 1974.

On February 17, 1975, respondent Federation of Manila Market Vendors, Inc. commenced Civil
Case 96787 before the Court of First Instance of Manila presided over by respondent Judge,
seeking the declaration of nullity of Ordinance No. 7522 for the reason that (a) the publication
requirement under the Revised Charter of the City of Manila has not been complied with; (b) the
Market Committee was not given any participation in the enactment of the ordinance, as
envisioned by Republic Act 6039; (c) Section 3 (e) of the Anti-Graft and Corrupt Practices Act has
been violated; and (d) the ordinance would violate Presidential Decree No. 7 of September 30,
1972 prescribing the collection of fees and charges on livestock and animal products.

Resolving the accompanying prayer for the issuance of a writ of preliminary injunction,
respondent Judge issued an order on March 11, 1975, denying the plea for failure of the
respondent Federation of Manila Market Vendors, Inc. to exhaust the administrative remedies
outlined in the Local Tax Code.

After due hearing on the merits, respondent Judge rendered its decision on August 29, 1975,
declaring the nullity of Ordinance No. 7522 of the City of Manila on the primary ground of non-
compliance with the requirement of publication under the Revised City Charter. Respondent Judge
ruled:

There is, therefore, no question that the ordinance in question was not published at all in two daily
newspapers of general circulation in the City of Manila before its enactment. Neither was it
published in the same manner after approval, although it was posted in the legislative hall and in
all city public markets and city public libraries. There being no compliance with the mandatory
requirement of publication before and after approval, the ordinance in question is invalid and,
therefore, null and void.

Petitioners moved for reconsideration of the adverse decision, stressing that (a) only a post-
publication is required by the Local Tax Code; and (b) private respondent failed to exhaust all
administrative remedies before instituting an action in court.

On September 26, 1975, respondent Judge denied the motion.

Forthwith, petitioners brought the matter to Us through the present petition for review on
certiorari.

We find the petition impressed with merits.

1. The nexus of the present controversy is the apparent conflict between the Revised Charter of
the City of Manila and the Local Tax Code on the manner of publishing a tax ordinance enacted
by the Municipal Board of Manila. For, while Section 17 of the Revised Charter provides:

Each proposed ordinance shall be published in two daily newspapers of general circulation in the
city, and shall not be discussed or enacted by the Board until after the third day following such
publication. * * * Each approved ordinance * * * shall be published in two daily newspapers of
general circulation in the city, within ten days after its approval; and shall take effect and be in
force on and after the twentieth day following its publication, if no date is fixed in the ordinance.

Section 43 of the Local Tax Code directs:

Within ten days after their approval, certified true copies of all provincial, city, municipal and
barrio ordinances levying or imposing taxes, fees or other charges shall be published for three
consecutive days in a newspaper or publication widely circulated within the jurisdiction of the
local government, or posted in the local legislative hall or premises and in two other conspicuous
places within the territorial jurisdiction of the local government. In either case, copies of all
provincial, city, municipal and barrio ordinances shall be furnished the treasurers of the respective
component and mother units of a local government for dissemination.

In other words, while the Revised Charter of the City of Manila requires publication before the
enactment of the ordinance and after the approval thereof in two daily newspapers of general
circulation in the city, the Local Tax Code only prescribes for publication after the approval of
"ordinances levying or imposing taxes, fees or other charges" either in a newspaper or publication
widely circulated within the jurisdiction of the local government or by posting the ordinance in the
local legislative hall or premises and in two other conspicuous places within the territorial
jurisdiction of the local government. Petitioners' compliance with the Local Tax Code rather than
with the Revised Charter of the City spawned this litigation.

There is no question that the Revised Charter of the City of Manila is a special act since it relates
only to the City of Manila, whereas the Local Tax Code is a general law because it applies
universally to all local governments. Blackstone defines general law as a universal rule affecting
the entire community and special law as one relating to particular persons or things of a class. 1
And the rule commonly said is that a prior special law is not ordinarily repealed by a subsequent
general law. The fact that one is special and the other general creates a presumption that the
special is to be considered as remaining an exception of the general, one as a general law of the
land, the other as the law of a particular case. 2 However, the rule readily yields to a situation
where the special statute refers to a subject in general, which the general statute treats in particular.
The exactly is the circumstance obtaining in the case at bar. Section 17 of the Revised Charter of
the City of Manila speaks of "ordinance" in general, i.e., irrespective of the nature and scope
thereof, whereas, Section 43 of the Local Tax Code relates to "ordinances levying or imposing
taxes, fees or other charges" in particular. In regard, therefore, to ordinances in general, the
Revised Charter of the City of Manila is doubtless dominant, but, that dominant force loses its
continuity when it approaches the realm of "ordinances levying or imposing taxes, fees or other
charges" in particular. There, the Local Tax Code controls. Here, as always, a general provision
must give way to a particular provision. 3 Special provision governs. 4 This is especially true
where the law containing the particular provision was enacted later than the one containing the
general provision. The City Charter of Manila was promulgated on June 18, 1949 as against the
Local Tax Code which was decreed on June 1, 1973. The law-making power cannot be said to
have intended the establishment of conflicting and hostile systems upon the same subject, or to
leave in force provisions of a prior law by which the new will of the legislating power may be
thwarted and overthrown. Such a result would render legislation a useless and Idle ceremony, and
subject the law to the reproach of uncertainty and unintelligibility. 5

The case of City of Manila v. Teotico 6 is opposite. In that case, Teotico sued the City of Manila
for damages arising from the injuries he suffered when he fell inside an uncovered and unlighted
catchbasin or manhole on P. Burgos Avenue. The City of Manila denied liability on the basis of the
City Charter (R.A. 409) exempting the City of Manila from any liability for damages or injury to
persons or property arising from the failure of the city officers to enforce the provisions of the
charter or any other law or ordinance, or from negligence of the City Mayor, Municipal Board, or
other officers while enforcing or attempting to enforce the provisions of the charter or of any other
law or ordinance. Upon the other hand, Article 2189 of the Civil Code makes cities liable for
damages for the death of, or injury suffered by any persons by reason of the defective condition of
roads, streets, bridges, public buildings, and other public works under their control or supervision.
On review, the Court held the Civil Code controlling. It is true that, insofar as its territorial
application is concerned, the Revised City Charter is a special law and the subject matter of the
two laws, the Revised City Charter establishes a general rule of liability arising from negligence in
general, regardless of the object thereof, whereas the Civil Code constitutes a particular
prescription for liability due to defective streets in particular. In the same manner, the Revised
Charter of the City prescribes a rule for the publication of "ordinance" in general, while the Local
Tax Code establishes a rule for the publication of "ordinance levying or imposing taxes fees or
other charges in particular.

In fact, there is no rule which prohibits the repeal even by implication of a special or specific act
by a general or broad one. 7 A charter provision may be impliedly modified or superseded by a
later statute, and where a statute is controlling, it must be read into the charter notwithstanding any
particular charter provision. 8 A subsequent general law similarly applicable to all cities prevails
over any conflicting charter provision, for the reason that a charter must not be inconsistent with
the general laws and public policy of the state. 9 A chartered city is not an independent
sovereignty. The state remains supreme in all matters not purely local. Otherwise stated, a charter
must yield to the constitution and general laws of the state, it is to have read into it that general
law which governs the municipal corporation and which the corporation cannot set aside but to
which it must yield. When a city adopts a charter, it in effect adopts as part of its charter general
law of such character. 10

2. The principle of exhaustion of administrative remedies is strongly asserted by petitioners as


having been violated by private respondent in bringing a direct suit in court. This is because
Section 47 of the Local Tax Code provides that any question or issue raised against the legality of
any tax ordinance, or portion thereof, shall be referred for opinion to the city fiscal in the case of
tax ordinance of a city. The opinion of the city fiscal is appealable to the Secretary of Justice,
whose decision shall be final and executory unless contested before a competent court within
thirty (30) days. But, the petition below plainly shows that the controversy between the parties is
deeply rooted in a pure question of law: whether it is the Revised Charter of the City of Manila or
the Local Tax Code that should govern the publication of the tax ordinance. In other words, the
dispute is sharply focused on the applicability of the Revised City Charter or the Local Tax Code
on the point at issue, and not on the legality of the imposition of the tax. Exhaustion of
administrative remedies before resort to judicial bodies is not an absolute rule. It admits of
exceptions. Where the question litigated upon is purely a legal one, the rule does not apply. 11 The
principle may also be disregarded when it does not provide a plain, speedy and adequate remedy.
It may and should be relaxed when its application may cause great and irreparable damage. 12

3. It is maintained by private respondent that the subject ordinance is not a "tax ordinance,"
because the imposition of rentals, permit fees, tolls and other fees is not strictly a taxing power but
a revenue-raising function, so that the procedure for publication under the Local Tax Code finds
no application. The pretense bears its own marks of fallacy. Precisely, the raising of revenues is
the principal object of taxation. Under Section 5, Article XI of the New Constitution, "Each local
government unit shall have the power to create its own sources of revenue and to levy taxes,
subject to such provisions as may be provided by law." 13 And one of those sources of revenue is
what the Local Tax Code points to in particular: "Local governments may collect fees or rentals
for the occupancy or use of public markets and premises * * *." 14 They can provide for and
regulate market stands, stalls and privileges, and, also, the sale, lease or occupancy thereof. They
can license, or permit the use of, lease, sell or otherwise dispose of stands, stalls or marketing
privileges. 15

It is a feeble attempt to argue that the ordinance violates Presidential Decree No. 7, dated
September 30, 1972, insofar as it affects livestock and animal products, because the said decree
prescribes the collection of other fees and charges thereon "with the exception of ante-mortem and
post-mortem inspection fees, as well as the delivery, stockyard and slaughter fees as may be
authorized by the Secretary of Agriculture and Natural Resources." 16 Clearly, even the exception
clause of the decree itself permits the collection of the proper fees for livestock. And the Local Tax
Code (P.D. 231, July 1, 1973) authorizes in its Section 31: "Local governments may collect fees
for the slaughter of animals and the use of corrals * * * "

4. The non-participation of the Market Committee in the enactment of Ordinance No. 7522
supposedly in accordance with Republic Act No. 6039, an amendment to the City Charter of
Manila, providing that "the market committee shall formulate, recommend and adopt, subject to
the ratification of the municipal board, and approval of the mayor, policies and rules or regulation
repealing or maneding existing provisions of the market code" does not infect the ordinance with
any germ of invalidity. 17 The function of the committee is purely recommendatory as the
underscored phrase suggests, its recommendation is without binding effect on the Municipal
Board and the City Mayor. Its prior acquiescence of an intended or proposed city ordinance is not
a condition sine qua non before the Municipal Board could enact such ordinance. The native
power of the Municipal Board to legislate remains undisturbed even in the slightest degree. It can
move in its own initiative and the Market Committee cannot demur. At most, the Market
Committee may serve as a legislative aide of the Municipal Board in the enactment of city
ordinances affecting the city markets or, in plain words, in the gathering of the necessary data,
studies and the collection of consensus for the proposal of ordinances regarding city markets.
Much less could it be said that Republic Act 6039 intended to delegate to the Market Committee
the adoption of regulatory measures for the operation and administration of the city markets.
Potestas delegata non delegare potest.

5. Private respondent bewails that the market stall fees imposed in the disputed ordinance are
diverted to the exclusive private use of the Asiatic Integrated Corporation since the collection of
said fees had been let by the City of Manila to the said corporation in a "Management and
Operating Contract." The assumption is of course saddled on erroneous premise. The fees
collected do not go direct to the private coffers of the corporation. Ordinance No. 7522 was not
made for the corporation but for the purpose of raising revenues for the city. That is the object it
serves. The entrusting of the collection of the fees does not destroy the public purpose of the
ordinance. So long as the purpose is public, it does not matter whether the agency through which
the money is dispensed is public or private. The right to tax depends upon the ultimate use,
purpose and object for which the fund is raised. It is not dependent on the nature or character of
the person or corporation whose intermediate agency is to be used in applying it. The people may
be taxed for a public purpose, although it be under the direction of an individual or private
corporation. 18

Nor can the ordinance be stricken down as violative of Section 3(e) of the Anti-Graft and Corrupt
Practices Act because the increased rates of market stall fees as levied by the ordinance will
necessarily inure to the unwarranted benefit and advantage of the corporation. 19 We are
concerned only with the issue whether the ordinance in question is intra vires. Once determined in
the affirmative, the measure may not be invalidated because of consequences that may arise from
its enforcement. 20

ACCORDINGLY, the decision of the court below is hereby reversed and set aside. Ordinance No.
7522 of the City of Manila, dated June 15, 1975, is hereby held to have been validly enacted. No.
costs.

SO ORDERED.

Castro, C.J., Barredo, Makasiar, Antonio, Muñoz Palma, Aquino and Concepcion, Jr., JJ., concur.

Teehankee, J., reserves his vote.

Separate Opinions

FERNANDO, J., concurring:

But qualifies his assent as to an ordinance intra vires not being open to question "because of
consequences that may arise from its enforcement."

Separate Opinions
FERNANDO, J., concurring:

But qualifies his assent as to an ordinance intra vires not being open to question "because of
consequences that may arise from its enforcement."

Footnotes
1 Cooley, The Law of Taxation, Vol. 2, 4th ed.

2 Butuan Sawmill, Inc. vs. City of Butuan, L-21516, April 29, 1966, 16 SCRA 758, citing State
v. Stoll, 17 Wall. 425.

3 Lichauco & Co. v. Apostol, 44 Phil. 145 (1922).

4 Crawford, Construction of Statutes, 265, citing U.S. v. Jackson, 143 Fed. 783.

5 See Separate Opinion of Justice Johns in Lichauco, fn. 3, citing Lewis' Sutherland Statutory
Construction, at 161.

6 L-23052, January 29, 1968, 22 SCRA 270.

7 See 73 Am Jur 2d 521.

8 McQuillin, Municipal Corporation, Vol. 6, 3rd ed., 223.

9 See Bowyer v. Camden, 11 Atl. 137.

10 McQuillin, Municipal Corporation, Vol. 6, 3rd ed., 229-230.

11 Tapales v. President and Board of Regents of the U.P., L-17523, March 30, 1963, 7 SCRA
553; C.N. Hodges v. Municipal Board of the City of Iloilo, L-18276, January 12, 1967, 19 SCRA
32-33; Aguilar v. Valencia, L-30396, July 30, 1971, 40 SCRA 214;. Mendoza v. SSC, L-29189,
April 11, 1972, 44 SCRA 380.

12 Cipriano v. Marcelino, L-27793, February 28, 1972, 43 SCRA 291; Del Mar v. PVA, L-
27299, June 27, 1973, 51 SCRA 346, citing cases.

13 See City of Bacolod v. Enriquez, L-27408, July 25, 1975, Second Division, per Fernando, J.,
65 SCRA 384-85.

14 Article 5, Section 30, Chapter II.

15 McQuillin, Municipal Corporations, Vol. 7, 3rd ed., 275.

16 P.D. 7 was amended by P.D. 45 on November 10, 1972, so as to allow local governments to
charge the ordinary fee for the issuance of certificate of ownership and one peso for the issuance
of transfer certificate for livestock.

17 The market committee is composed of the market administrator as chairman, and a


representative of each of the city treasurer, the municipal board, the Chamber of Filipino Retailers,
Inc. and the Manila Market Vendors Association Inc. as members.

18 Cooley, The Law of Taxation, Vol. 1, 394-95.

19 Section 3 (e) causing any undue injury to any party, including the government, or giving any
private party any unwarranted benefits, advantage or preference in the discharge of his official
administrative or judicial functions through manifest partiality, evident bad faith or gross
inexcusable negligence.* * *

20 Willoughby, The Constitutional Law of the United States, 668 et seq.

The Lawphil Project - Arellano Law Foundation

EN BANC
Agenda for October 18, 2005
Item No. 45

G.R. No. 168056 (ABAKADA Guro Party List Officer Samson S. Alcantara, et al. vs. The Hon.
Executive Secretary Eduardo R. Ermita); G.R. No. 168207 (Aquilino Q. Pimentel, Jr., et al. vs.
Executive Secretary Eduardo R. Ermita, et al.); G.R. No. 168461 (Association of Pilipinas Shell
Dealers, Inc., et al. vs. Cesar V. Purisima, et al.); G.R. No. 168463 (Francis Joseph G. Escudero
vs. Cesar V. Purisima, et al); and G.R. No. 168730 (Bataan Governor Enrique T. Garcia, Jr. vs.
Hon. Eduardo R. Ermita, et al.)

RESOLUTION

For resolution are the following motions for reconsideration of the Courts Decision dated
September 1, 2005 upholding the constitutionality of Republic Act No. 9337 or the VAT Reform
Act[1]:

1) Motion for Reconsideration filed by petitioners in G.R. No. 168463, Escudero, et al., on the
following grounds:

A. THE DELETION OF THE NO PASS ON PROVISIONS FOR THE SALE OF PETROLEUM


PRODUCTS AND POWER GENERATION SERVICES CONSTITUTED GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION ON THE PART OF
THE BICAMERAL CONFERENCE COMMITTEE.

B. REPUBLIC ACT NO. 9337 GROSSLY VIOLATES THE CONSTITUTIONAL IMPERATIVE


ON EXCLUSIVE ORIGINATION OF REVENUE BILLS UNDER 24, ARTICLE VI, 1987
PHILIPPINE CONSTITUTION.

C. REPUBLIC ACT NO. 9337S STAND-BY AUTHORITY TO THE EXECUTIVE TO


INCREASE THE VAT RATE, ESPECIALLY ON ACCOUNT OF THE EFFECTIVE
RECOMMENDATORY POWER GRANTED TO THE SECRETARY OF FINANCE,
CONSTITUTES UNDUE DELEGATION OF LEGISLATIVE AUTHORITY.

2) Motion for Reconsideration of petitioner in G.R. No. 168730, Bataan Governor Enrique T.
Garcia, Jr., with the argument that burdening the consumers with significantly higher prices under
a VAT regime vis--vis a 3% gross tax renders the law unconstitutional for being arbitrary,
oppressive and inequitable.

and

3) Motion for Reconsideration by petitioners Association of Pilipinas Shell Dealers, Inc. in G.R.
No. 168461, on the grounds that:

I. This Honorable Court erred in upholding the constitutionality of Section 110(A)(2) and Section
110(B) of the NIRC, as amended by the EVAT Law, imposing limitations on the amount of input
VAT that may be claimed as a credit against output VAT, as well as Section 114(C) of the NIRC, as
amended by the EVAT Law, requiring the government or any of its instrumentalities to withhold a
5% final withholding VAT on their gross payments on purchases of goods and services, and
finding that the questioned provisions:

A. are not arbitrary, oppressive and consfiscatory as to amount to a deprivation of property


without due process of law in violation of Article III, Section 1 of the 1987 Philippine
Constitution;
B. do not violate the equal protection clause prescribed under Article III, Section 1 of the 1987
Philippine Constitution; and
C. apply uniformly to all those belonging to the same class and do not violate Article VI, Section
28(1) of the 1987 Philippine Constitution.

II. This Honorable Court erred in upholding the constitutionality of Section 110(B) of the NIRC,
as amended by the EVAT Law, imposing a limitation on the amount of input VAT that may be
claimed as a credit against output VAT notwithstanding the finding that the tax is not progressive
as exhorted by Article VI, Section 28(1) of the 1987 Philippine Constitution.

Respondents filed their Consolidated Comment. Petitioner Garcia filed his Reply.
Petitioners Escudero, et al., insist that the bicameral conference committee should not even have
acted on the no pass-on provisions since there is no disagreement between House Bill Nos. 3705
and 3555 on the one hand, and Senate Bill No. 1950 on the other, with regard to the no pass-on
provision for the sale of service for power generation because both the Senate and the House were
in agreement that the VAT burden for the sale of such service shall not be passed on to the end-
consumer. As to the no pass-on provision for sale of petroleum products, petitioners argue that the
fact that the presence of such a no pass-on provision in the House version and the absence thereof
in the Senate Bill means there is no conflict because a House provision cannot be in conflict with
something that does not exist.

Such argument is flawed. Note that the rules of both houses of Congress provide that a conference
committee shall settle the differences in the respective bills of each house. Verily, the fact that a no
pass-on provision is present in one version but absent in the other, and one version intends two
industries, i.e., power generation companies and petroleum sellers, to bear the burden of the tax,
while the other version intended only the industry of power generation, transmission and
distribution to be saddled with such burden, clearly shows that there are indeed differences
between the bills coming from each house, which differences should be acted upon by the
bicameral conference committee. It is incorrect to conclude that there is no clash between two
opposing forces with regard to the no pass-on provision for VAT on the sale of petroleum products
merely because such provision exists in the House version while it is absent in the Senate version.
It is precisely the absence of such provision in the Senate bill and the presence thereof in the
House bills that causes the conflict. The absence of the provision in the Senate bill shows the
Senates disagreement to the intention of the House of Representatives make the sellers of
petroleum bear the burden of the VAT. Thus, there are indeed two opposing forces: on one side,
the House of Representatives which wants petroleum dealers to be saddled with the burden of
paying VAT and on the other, the Senate which does not see it proper to make that particular
industry bear said burden. Clearly, such conflicts and differences between the no pass-on
provisions in the Senate and House bills had to be acted upon by the bicameral conference
committee as mandated by the rules of both houses of Congress.

Moreover, the deletion of the no pass-on provision made the present VAT law more in consonance
with the very nature of VAT which, as stated in the Decision promulgated on September 1, 2005, is
a tax on spending or consumption, thus, the burden thereof is ultimately borne by the end-
consumer.

Escudero, et al., then claim that there had been changes introduced in the Rules of the House of
Representatives regarding the conduct of the House panel in a bicameral conference committee,
since the time of Tolentino vs. Secretary of Finance[2] to act as safeguards against possible abuse
of authority by the House members of the bicameral conference committee. Even assuming that
the rule requiring the House panel to report back to the House if there are substantial differences in
the House and Senate bills had indeed been introduced after Tolentino, the Court stands by its
ruling that the issue of whether or not the House panel in the bicameral conference committee
complied with said internal rule cannot be inquired into by the Court. To reiterate, mere failure to
conform to parliamentary usage will not invalidate the action (taken by a deliberative body) when
the requisite number of members have agreed to a particular measure.[3]

Escudero, et. al., also contend that Republic Act No. 9337 grossly violates the constitutional
imperative on exclusive origination of revenue bills under Section 24 of Article VI of the
Constitution when the Senate introduced amendments not connected with VAT.

The Court is not persuaded.

Article VI, Section 24 of the Constitution provides:

Sec. 24 All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills
of local application, and private bills shall originate exclusively in the House of Representatives,
but the Senate may propose or concur with amendments.
Section 24 speaks of origination of certain bills from the House of Representatives which has been
interpreted in the Tolentino case as follows:

To begin with, it is not the law but the revenue bill which is required by the Constitution to
"originate exclusively" in the House of Representatives. It is important to emphasize this, because
a bill originating in the House may undergo such extensive changes in the Senate that the result
may be a rewriting of the whole At this point, what is important to note is that, as a result of the
Senate action, a distinct bill may be produced. To insist that a revenue statute and not only the bill
which initiated the legislative process culminating in the enactment of the law must substantially
be the same as the House bill would be to deny the Senate's power not only to "concur with
amendments" but also to " propose amendments." It would be to violate the coequality of
legislative power of the two houses of Congress and in fact make the House superior to the Senate.

Given, then, the power of the Senate to propose amendments, the Senate can propose its own
version even with respect to bills which are required by the Constitution to originate in the House.
...
Indeed, what the Constitution simply means is that the initiative for filing revenue, tariff, or tax
bills, bills authorizing an increase of the public debt, private bills and bills of local application
must come from the House of Representatives on the theory that, elected as they are from the
districts, the members of the House can be expected to be more sensitive to the local needs and
problems. On the other hand, the senators, who are elected at large, are expected to approach the
same problems from the national perspective. Both views are thereby made to bear on the
enactment of such laws.[4]

Clearly, after the House bills as approved on third reading are duly transmitted to the Senate, the
Constitution states that the latter can propose or concur with amendments. The Court finds that the
subject provisions found in the Senate bill are within the purview of such constitutional provision
as declared in the Tolentino case.

The intent of the House of Representatives in initiating House Bill Nos. 3555 and 3705 was to
solve the countrys serious financial problems. It was stated in the respective explanatory notes that
there is a need for the government to make significant expenditure savings and a credible package
of revenue measures. These measures include improvement of tax administration and control and
leakages in revenues from income taxes and value added tax. It is also stated that one opportunity
that could be beneficial to the overall status of our economy is to review existing tax rates,
evaluating the relevance given our present conditions. Thus, with these purposes in mind and to
accomplish these purposes for which the house bills were filed, i.e., to raise revenues for the
government, the Senate introduced amendments on income taxes, which as admitted by Senator
Ralph Recto, would yield about P10.5 billion a year.

Moreover, since the objective of these house bills is to raise revenues, the increase in corporate
income taxes would be a great help and would also soften the impact of VAT measure on the
consumers by distributing the burden across all sectors instead of putting it entirely on the
shoulders of the consumers.

As to the other National Internal Revenue Code (NIRC) provisions found in Senate Bill No. 1950,
i.e., percentage taxes, franchise taxes, amusement and excise taxes, these provisions are needed so
as to cushion the effects of VAT on consumers. As we said in our decision, certain goods and
services which were subject to percentage tax and excise tax would no longer be VAT exempt,
thus, the consumer would be burdened more as they would be paying the VAT in addition to these
taxes. Thus, there is a need to amend these sections to soften the impact of VAT. The Court finds
no reason to reverse the earlier ruling that the Senate introduced amendments that are germane to
the subject matter and purposes of the house bills.

Petitioners Escudero, et al., also reiterate that R.A. No. 9337s stand- by authority to the Executive
to increase the VAT rate, especially on account of the recommendatory power granted to the
Secretary of Finance, constitutes undue delegation of legislative power. They submit that the
recommendatory power given to the Secretary of Finance in regard to the occurrence of either of
two events using the Gross Domestic Product (GDP) as a benchmark necessarily and inherently
required extended analysis and evaluation, as well as policy making.

There is no merit in this contention. The Court reiterates that in making his recommendation to the
President on the existence of either of the two conditions, the Secretary of Finance is not acting as
the alter ego of the President or even her subordinate. He is acting as the agent of the legislative
department, to determine and declare the event upon which its expressed will is to take effect. The
Secretary of Finance becomes the means or tool by which legislative policy is determined and
implemented, considering that he possesses all the facilities to gather data and information and has
a much broader perspective to properly evaluate them. His function is to gather and collate
statistical data and other pertinent information and verify if any of the two conditions laid out by
Congress is present. Congress granted the Secretary of Finance the authority to ascertain the
existence of a fact, namely, whether by December 31, 2005, the value-added tax collection as a
percentage of GDP of the previous year exceeds two and four-fifth percent (24/5%) or the national
government deficit as a percentage of GDP of the previous year exceeds one and one-half percent
(1%). If either of these two instances has occurred, the Secretary of Finance, by legislative
mandate, must submit such information to the President. Then the 12% VAT rate must be imposed
by the President effective January 1, 2006. Congress does not abdicate its functions or unduly
delegate power when it describes what job must be done, who must do it, and what is the scope of
his authority; in our complex economy that is frequently the only way in which the legislative
process can go forward. There is no undue delegation of legislative power but only of the
discretion as to the execution of a law. This is constitutionally permissible. Congress did not
delegate the power to tax but the mere implementation of the law. The intent and will to increase
the VAT rate to 12% came from Congress and the task of the President is to simply execute the
legislative policy. That Congress chose to use the GDP as a benchmark to determine economic
growth is not within the province of the Court to inquire into, its task being to interpret the law.

With regard to petitioner Garcias arguments, the Court also finds the same to be without merit. As
stated in the assailed Decision, the Court recognizes the burden that the consumers will be bearing
with the passage of R.A. No. 9337. But as was also stated by the Court, it cannot strike down the
law as unconstitutional simply because of its yokes. The legislature has spoken and the only role
that the Court plays in the picture is to determine whether the law was passed with due regard to
the mandates of the Constitution. Inasmuch as the Court finds that there are no constitutional
infirmities with its passage, the validity of the law must therefore be upheld.

Finally, petitioners Association of Pilipinas Shell Dealers, Inc. reiterated their arguments in the
petition, citing this time, the dissertation of Associate Justice Dante O. Tinga in his Dissenting
Opinion.

The glitch in petitioners arguments is that it presents figures based on an event that is yet to
happen. Their illustration of the possible effects of the 70% limitation, while seemingly concrete,
still remains theoretical. Theories have no place in this case as the Court must only deal with an
existing case or controversy that is appropriate or ripe for judicial determination, not one that is
conjectural or merely anticipatory.[5] The Court will not intervene absent an actual and substantial
controversy admitting of specific relief through a decree conclusive in nature, as distinguished
from an opinion advising what the law would be upon a hypothetical state of facts.[6]

The impact of the 70% limitation on the creditable input tax will ultimately depend on how one
manages and operates its business. Market forces, strategy and acumen will dictate their moves.
With or without these VAT provisions, an entrepreneur who does not have the ken to adapt to
economic variables will surely perish in the competition. The arguments posed are within the
realm of business, and the solution lies also in business.

Petitioners also reiterate their argument that the input tax is a property or a property right. In the
same breath, the Court reiterates its finding that it is not a property or a property right, and a VAT-
registered persons entitlement to the creditable input tax is a mere statutory privilege.

Petitioners also contend that even if the right to credit the input VAT is merely a statutory
privilege, it has already evolved into a vested right that the State cannot remove.

As the Court stated in its Decision, the right to credit the input tax is a mere creation of law. Prior
to the enactment of multi-stage sales taxation, the sales taxes paid at every level of distribution are
not recoverable from the taxes payable. With the advent of Executive Order No. 273 imposing a
10% multi-stage tax on all sales, it was only then that the crediting of the input tax paid on
purchase or importation of goods and services by VAT-registered persons against the output tax
was established. This continued with the Expanded VAT Law (R.A. No. 7716), and The Tax
Reform Act of 1997 (R.A. No. 8424). The right to credit input tax as against the output tax is
clearly a privilege created by law, a privilege that also the law can limit. It should be stressed that
a person has no vested right in statutory privileges.[7]

The concept of vested right is a consequence of the constitutional guaranty of due process that
expresses a present fixed interest which in right reason and natural justice is protected against
arbitrary state action; it includes not only legal or equitable title to the enforcement of a demand
but also exemptions from new obligations created after the right has become vested. Rights are
considered vested when the right to enjoyment is a present interest, absolute, unconditional, and
perfect or fixed and irrefutable.[8] As adeptly stated by Associate Justice Minita V. Chico-Nazario
in her Concurring Opinion, which the Court adopts, petitioners right to the input VAT credits has
not yet vested, thus

It should be remembered that prior to Rep. Act No. 9337, the petroleum dealers input VAT credits
were inexistent they were unrecognized and disallowed by law. The petroleum dealers had no
such property called input VAT credits. It is only rational, therefore, that they cannot acquire
vested rights to the use of such input VAT credits when they were never entitled to such credits in
the first place, at least, not until Rep. Act No. 9337.

My view, at this point, when Rep. Act No. 9337 has not yet even been implemented, is that
petroleum dealers right to use their input VAT as credit against their output VAT unlimitedly has
not vested, being a mere expectancy of a future benefit and being contingent on the continuance of
Section 110 of the National Internal Revenue Code of 1997, prior to its amendment by Rep. Act
No. 9337.

The elucidation of Associate Justice Artemio V. Panganiban is likewise worthy of note, to wit:

Moreover, there is no vested right in generally accepted accounting principles. These refer to
accounting concepts, measurement techniques, and standards of presentation in a companys
financial statements, and are not rooted in laws of nature, as are the laws of physical science, for
these are merely developed and continually modified by local and international regulatory
accounting bodies. To state otherwise and recognize such asset account as a vested right is to limit
the taxing power of the State. Unlimited, plenary, comprehensive and supreme, this power cannot
be unduly restricted by mere creations of the State.

More importantly, the assailed provisions of R.A. No. 9337 already involve legislative policy and
wisdom. So long as there is a public end for which R.A. No. 9337 was passed, the means through
which such end shall be accomplished is for the legislature to choose so long as it is within
constitutional bounds. As stated in Carmichael vs. Southern Coal & Coke Co.:
If the question were ours to decide, we could not say that the legislature, in adopting the present
scheme rather than another, had no basis for its choice, or was arbitrary or unreasonable in its
action. But, as the state is free to distribute the burden of a tax without regard to the particular
purpose for which it is to be used, there is no warrant in the Constitution for setting the tax aside
because a court thinks that it could have distributed the burden more wisely. Those are functions
reserved for the legislature.[9]

WHEREFORE, the Motions for Reconsideration are hereby DENIED WITH FINALITY. The
temporary restraining order issued by the Court is LIFTED.

SO ORDERED.
(The Justices who filed their respective concurring and dissenting opinions maintain their
respective positions. Justice Dante O. Tinga filed a dissenting opinion to the present Resolution;
while Justice Consuelo Ynares- Santiago joins him in his dissenting opinion.)

[1] Also referred to as the EVAT Law.


[2] G.R. Nos. 115455, 115525, 115543, 115544, 115754, 115781, 115852, 115873 and 115931,
August 25, 1994, 235 SCRA 630.
[3] Farias vs. The Executive Secretary, G.R. No. 147387, December 10, 2003, 417 SCRA 503,
530.
[4] Supra, note no. 2, pp. 661-663.
[5] Velarde vs. Social Justice Society, G.R. No. 159357, April 28, 2004, 428 SCRA 283.
[6] Information Technology Foundation of the Phils. vs. COMELEC, G.R. No. 159139, June 15,
2005.
[7] Lahom vs. Sibulo, G.R. No. 143989, July 14, 2003, 406 SCRA 135.
[8] Ibid.
[9] 301 U.S. 495.

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Republic of the Philippines


SUPREME COURT
Manila

EN BANC

G.R. No. L-1104 May 31, 1949

EASTERN THEATRICAL CO., INC., ET AL., plaintiffs-appellants,


vs.
VICTOR, ALFONSO as City Treasurer of Manila, THE MUNICIPAL BOARD OF THE CITY
OF MANILA, and JUAN NOLASCO, as Mayor of the City of Manila, defendants-appellees.

Francisco Zulueta and Poblador Jr. for appellants.


City Fiscal Jose P. Bengzon and Assistant City Fiscal Julio Villamor for appellees.
Assistant Solicitor General Carmelino G. Alvendia, Solicitor Guillermo E.Torres and Manuel D.
Baldeo as amicus curiae.

PERFECTO, J.:

Twelve corporation engaged in motion picture business have initiated these proceeding through a
complaint dated May 5, 1946, to impugn the validity of Ordinance No. 2958 of the City of Manila
which was enacted by the municipalBoard of said city on April 25 1946 approved by the Mayor
on April 27, 1946 and took effect on May 1, 1946 said ordinance reading as follows:

AN ORDINANCE IMPOSING A FEE ON THE PRICE OF EVERY ADMISSION TICKET


SOLD BY CINEMATOGRAPHS, THEATERS VAUDEVILLE COMPANIES THEATRICAL
SHOWS AND BOXING EXHIBITION AND PROVIDING FOR OTHER PURPOSES.

SEC. 1. In addition to the fees paid by cinematographers, theaters, vaudeville companies,


theatrical shows and boxing exhibitions, as provided for in sections 633 and 778 of Ordinance No.
1600, known as the Revised Ordinance of the City of Manila, as amended, there shall be collected
from the place of amusement which are specifically mentioned above the following fees on the
price of every admission ticket sold by such enterprises:

a. For every ticket sold the price of which is from P0.25 to P0.99

P0.05

b. For every ticket sold the price of which is from P1 to P1.99


0.10

c. For every ticket sold the price of which is from P2 to P2.99

0.15

d. for every ticket sold the price of which is from P3 to P4.99

0.20

e. or every ticket sold the price of which is from P5 to P5.99

0.25

f. For every ticket sold the price of which is from P0 to P14.99

0.35

g. For ticket sold thee price of which is from P15 or more

0.50

SEC. 2 It shall be the duty of every proprietor lessee, promoter, or operatorof such
cinematographs, theater, vaudeville companies, theatrical show and boxing exhibition to provide
himself with tickets which shall be serially numbered, indication therein the name of amusement
place and the fee charge for admission. Before such ticket are sold he same shall be presented to
the office of the city Treasurer for registration. Tickets once issued and presented at the gate of
entrance shall be cut by the gatekeeper into halves, the first half to be returned to the customer and
the other half to be retained by the gate keeper.

It shall also be the duty of said proprietor lessee promoter or operator to deliver to the Office of
the City Treasurer the fees corresponding to the number of ticket old by him within two days after
the performances or exhibition has taken place.

SEC. 3. The fees herein prescribed shall not be paid where the admission fees or charge are
collection for and in behalf of any charitable education or religion institution or association.

All place of amusement which are operate by U.S. Army and Navy with fund belonging to the
U.S. Government are hereby exempted from fees herein imposed.

SEC. 4. Any person violation any of the provision of this ordinance shall upon conviction thereof
be punished by a fine of not more than P200 or by imprisonment for not more than six months or
by both such fine and imprisonment in the discretion of the court. If the violation is committed by
the club firm or corporation the manager the managing director or person charged with the
management of the business of such club firm or corporation shall be criminally responsible
therefor.

SEC. 5. This Ordinance shall take effect on the May 1, 1946.

Plaintiffs, operator of theaters in Manila And distributor of local or imported films allege that they
are interested in the provision of section 1,2 and 4 of said ordinance which they impugn as null
and void upon the following grounds: (a) For violation the Constitution more particular the
provision regarding the uniformity and equality of taxation and thee equal protection of the laws;
(b) because the Municipal Board of Manila exceeded and over-stepped the power granted it the
Charter of the City of Manila; (c) because it contravenes violates and is inconsistent with, existing
nationallegislation more particularly revenue and tax laws and (d) because it is unfair, unjust,
arbitrary capricious unreasonable oppressive and is contrary to and violation our basic and
recognizes principles of taxation and licensing laws.

Defendants allege as affirmative defenses the following: (a) That the ordinance was passed by the
Municipal Board of Manila by virtue of its express legislative power to tax fix the license fee and
regulate the business of theaters, cinematographs and further to fix the location of and to tax, fix
the license fee for and regulate the business of theatrical performances public exhibition circus and
other performances and places of amusement; (b) that the graduated tax required by said ordinance
being applied to all cinematographs, theaters, vaudeville companies theatricalshow and boxing
exhibitions similarly situated and as a class without distinction or exception the same does not
violate the prohibition against uniformity and equality of taxation; (c) that the graduated tax
onadmission tickets to theaters and other places of amusement imposed by the National Internal
Revenue Code (Commonwealth Act No. 466) is collected by and for the purposes of the National
Government, whereas, Ordinance No.2958 imposes and requires the collection of a similar tax by
and for the purposes of the Government of the City of Manila, and there is no case of double
taxation, (d) that said ordinance having been enacted under the express power of the Municipal
Board to tax for revenue as distinguishedfrom its power to license for purely police purposes, the
fact that the amount collected thereunder are higher than what are needed for police regulation and
supervision does not render said ordinance unfair unjust capricious unreasonable and oppressive;
(e) that consideration the nature of the business of the plaintiffs and the enormous volume of
business they handle the graduated tax fixed by the ordinance is not unreasonable.

Defendants allege also that since May 1, 1946, when the ordinance in question took effect
plaintiffs have been charging the theater-going public increased prices for admission to the
cinematographs owned and operated to the graduated tax imposed by said ordinance and as a
result while refusing to pay said tax but at the same time collecting an amount equal to said tax
plaintiffs have taken undue advantage of said ordinance to realized more profits.

On September 5, 1946, Judge Emilio Pena of the court of first Instance of Manila rendered a
decision upholding the validity of Ordinance No. 2958.

Plaintiffs appellants assign in the their brief three errors committed by the trial court. We will
consider them separately.

Appellants contend that the lower court erred in holding that under section 2444 (m) of the
Revised administrative Code the Municipal Board of the City ofManila had the power to enact
Ordinance No. 2958.

Section 2444 (m) of the Revised Administrative code reads as follows:

To tax fix the license fee and regulate the business of hotels restaurants refreshment places, cafes,
lodging houses, boarding houses livery garages warehouses, pawnshops theaters, cinematographs;
and further to fix the location of and to tax fix the license fee for and regulate the businessof lively
stables, the license fee for and regulate the business of livery stable, boarding stables, embalmers,
public billiard table public pool tables, bowling alleys, dance halls, public dancing halls, cabarets,
circusand other similar parades, public vehicles, race tracks, horse races,Junk dealers, theatrical
performances, public exhibitions, circus andother performances and places of amusements, match
factories, blacksmith shops, foundries, steam boilers, lumber yards, shipyards, thestorage and sale
of gunpowder, tar, pitch, resin, coal, oil, gasoline,benzene, turpentine, 'hemp, cotton, nitroglycerin,
petroleum or any Ofthe products thereof and of all other highly combustible or explosivematerials
and other establishment likely to endanger the public safety or give rise to conflagration or
explosion and subject to the provision of ordinance issue by the (Philippines Health Service)
Bureau of Health in accordance with law tanneries, renders tallow chandlers bone factories and
soap factories.

Appellants line of argument runs as follows:

By virtue of the specific power granted in the above quoted provision of the Revised
Administration Code Ordinance No. 2958 was enacted.

On August 7, 1940 the National Assembly enacted Commonwealth Act No. 466, known as the
National Internal Revenue Code section 18, 260 and 261 of which read as follows:

SEC. 18. Sources of revenue. — The following taxes fees and charges are deemed to be national
internal revenue taxes:

(a) Income tax;


(b) Estate inheritance and gift taxes;
(c) Specific taxes on certain articles;
(d) Privilege taxes on business or occupation;
(e) Documentary stamp taxes;
(f) Mining taxes;
(g) Miscellaneous taxes fees and charges, namely, taxes on banks and insurance companies
franchise taxes on amusements charges on forest product fees for sealing weights and measures
firearms license fees radio registration fees and water rentals.
SEC. 260. Amusement taxes. — There shall be collected from the proprietor, lessee, or operation
of theater cinematographs, concert halls, circuses, boxing exhibition and other places of
amusement the following taxes:

(a) When the amount paid for admission exceeds twenty-nine centavos, two centavos on each
admission;

(b) When the amount paid for admission exceeds twenty-nine but does not exceed thirty-nine
centavos, three centavos on each admission;

(c) When the amount paid for admission exceeds thirty-nine centavos but does not exceed forty-
nine centavos four centavos on each admission.

(d) When the amount paid for admission exceeds forty-nine centavos but does not exceed fifty-
nine centavos five admission.

(e) When the amount paid for admission exceeds fifty-nine centavos but does not exceed sixty-
nine centavos six centavos on each admission.

(f) When the amount paid for admission exceeds sixty-nine centavos but does not exceed seventy
nine centavos seven centavos on each admission.

(g) When the amount paid for admission exceeds seventy nine centavos but does not exceed
eighty-nine centavos eight centavos on each admission;

(h) When the amount paid for admission exceeds eighty-nine centavos but does not exceed ninty-
nine centavos, nine centavos on each admission;

(i) When the amount paid for admission exceeds ninety-nine centavos, ten centavos on each
admission.

In the case of theaters or cinematographs, the taxes herein prescribed shall first be decuted and
withheld by the proprietros, lessees, or operators of such theaters or cinematogrphs and paid to the
Collector of Internal Revenue before the gross receipts are divided between the proprietros,
lessees, or operators of the theaters of cinematographs and the distributors of the cinematographic
films.

In the case of cockpits, race tracks, and cabarets, there shall be collected from the proprietor,
lessee, or operator a tax equivalent to ten per centum of the gross receipts, irrespective of whether
or not any amount is charged or paid for admission: Provided, however, That in the case of race
tracks, this tax is in addition to the privilege tax prescribed in seciton 193. for the purpose of the
amusement tax, the term "gross receipts" embraces all the receipts of the proprietor, lessee, or
operator of the amusement place, excluding the receipts derived by him from the sale of liquors,
beverages, or other articles subject to specific tax, or from any business subject to tax under this
Code. (This section was amended by section 8, Republic Act No. 39, effective October 1, 1946.
We are quoting the original provision to show the status of the law when the Ordinance was
passed.)

SEC. 261. Exemption. — The tax herein imposed shall not be paid where the admission fee or
charges are collected by or for and in behalf of any religious, charitable, scientific, or educational
institution or association, and where no part of the net proceeds of such admission fees or charges
inures to the benefit of any private stockholder or individual.

Ordinance No. 2958 does not specify the kind of the tax sought to be imposed but the seven
schedules and other details of said ordinance are, in every respect, identical with the amusement
tax provided by section 260 of Commonwealth Act No. 466.

But, plaintiffs argue, that section 2444(m) of the Revised Administrative Code confers upon the
City of Manila the power to impose a tax on business but not on amusement and, consequently,
Ordinance No. 2958 was enacted beyond the charter powers of the City of Manila.

The whole argument of plaintiffs hinges, therefore, on the assumption that the power granted to
the City of Manila by section 2444(m) of the Revised Administrative Code is limited to the
authority to impose a tax on business, with exclusion of the power to impose a tax amusement;
but, the assumption is based on an arbitrary labeling of the kind of tax authorized by said section
2444(m). The distinction made by plaintiffs as to the power to tax on business and the power to
tax on amusement has no ground under the provisions of section 2444(m) of the Revised
Administrative Code. The tax therein authorized cannot be defined as tax on business and cannot
be restricted within a smaller scope than what is authorized by the words used, to the extent of
excluding what plaintiffs describe as tax on amusement.

The very fact that section 2444 (m) of the Revised Administrative Code includes theaters,
cinematographs, public billiard tables, public pool tables, bowling alleys, dance halls, public
dancing halls, cabarets, circuses and other similar places, race tracks, horse races, theatrical
performances, public exhibition, circus and other performances and places of amusements, will
show conclusively that the power to tax amusement is expressly included within the power
granted by section 2444(m) of the Revised Administrative Code.

Plaintiffs-appellants contend that the lower court erred in not holding that section 2444 (m) of the
Revised Administrative Code was repealed or the power therein contained was withdrawn by the
National Assembly by the enactment of Commonwealth Act No. 466 known as the National
Internal Revenue Code.

In support of this contention, plaintiffs aver that the Charter of the City of Manila, containing
section 2444(m) of the Revised Administrative Code, was enacted on December 8, 1929. On April
25, 1940, the National Assembly enacted Commonwealth Act No. 466, including provisions on
amusement tax, covering the whole field on taxation and provided for more than what the
ordinance in question has provided. As a result, there are two taxing powers seeking to occupy
exactly the same field of legislation, and so the apparent conflict must be resolved with the
conclusion that, with the enactment of Commonwealth Act No. 466, as later amended by Republic
Act No. 39, section 2444(m) of the Revised Administrative Code has been impliedly repealed and
the power therein delegated to the City of Manila withdrawn.

We see absolutely no force in plaintiffs' contention. The conflict pointed out by them is imaginary.
Both provisions of law may stand together and be enforced at the same time without any
incompatibility among themselves.

Finally, plaintiffs contend that the trial court erred in not holding that Ordinance No. 2958 violated
the principle of equality and uniformity of taxation enjoined by the Constitution (sec. 22, sub-sec.
1, Art. VI, Constitution of the philippines).

To support this contenttion, appellantts point out to the fact that the ordinance in question does not
tax "many more kinds of amusements" than those therein specified, such as "race tracks, cockpits,
cabarets, concert halls, circuses, and other places of amusement." the argument has absolutely no
merit. The fact that some places of amusement are not taxed while others, such as cinematographs,
theaters, vaudeville companies, theatrical shows, and boxing exhibitions and other kinds of
amusements or places of amusement are taxed, is no argument at all against the equality and
uniformity of the tax imposition. Equality and uniformity of the tax imposition. Equality and
uniformity in taxation means that all taxable articles or kinds of property of the same class shall be
taxed at the same rate. The taxing power has the authority to make reasonable and natural
classifications for purposes of taxation; and the appellants cannot point out what places of
amusement taxed by the ordinance do not constitute a class by themselves and which can be
confused with those not included in the ordinance.

The judgment of the trial court is affirmed with costs against appellants.

Paras, Pablo, Bengzon, Tuason, Montemayor and Reyes, JJ., concur.


Perfecto, J., We certify that the Chief Justice voted to affirm the appealed judgment.

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Republic of the Philippines


SUPREME COURT
Manila

EN BANC

G.R. No. 163583 August 20, 2008

BRITISH AMERICAN TOBACCO, petitioner,


vs.
JOSE ISIDRO N. CAMACHO, in his capacity as Secretary of the Department of Finance and
GUILLERMO L. PARAYNO, JR., in his capacity as Commissioner of the Bureau of Internal
Revenue, respondents.
Philip Morris Philippines Manufacturing, Inc., fortune tobacco, corp., MIGHTY
CORPORATION, and JT InTERNATIONAL, S.A., respondents-in-intervention.

DECISION

YNARES-SANTIAGO, J.:

This petition for review assails the validity of: (1) Section 145 of the National Internal Revenue
Code (NIRC), as recodified by Republic Act (RA) 8424; (2) RA 9334, which further amended
Section 145 of the NIRC on January 1, 2005; (3) Revenue Regulations Nos. 1-97, 9-2003, and 22-
2003; and (4) Revenue Memorandum Order No. 6-2003. Petitioner argues that the said provisions
are violative of the equal protection and uniformity clauses of the Constitution.

RA 8240, entitled "An Act Amending Sections 138, 139, 140, and 142 of the NIRC, as Amended
and For Other Purposes," took effect on January 1, 1997. In the same year, Congress passed RA
8424 or The Tax Reform Act of 1997, re-codifying the NIRC. Section 142 was renumbered as
Section 145 of the NIRC.

Paragraph (c) of Section 145 provides for four tiers of tax rates based on the net retail price per
pack of cigarettes. To determine the applicable tax rates of existing cigarette brands, a survey of
the net retail prices per pack of cigarettes was conducted as of October 1, 1996, the results of
which were embodied in Annex "D" of the NIRC as the duly registered, existing or active brands
of cigarettes.

Paragraph (c) of Section 145, 1 states –

SEC. 145. Cigars and cigarettes. –

xxxx

(c) Cigarettes packed by machine. – There shall be levied, assessed and collected on cigarettes
packed by machine a tax at the rates prescribed below:

(1) If the net retail price (excluding the excise tax and the value-added tax) is above Ten pesos
(P10.00) per pack, the tax shall be Thirteen pesos and forty-four centavos (P13.44) per pack;

(2) If the net retail price (excluding the excise tax and the value-added tax) exceeds Six pesos and
fifty centavos (P6.50) but does not exceed Ten pesos (10.00) per pack, the tax shall be Eight pesos
and ninety-six centavos (P8.96) per pack;

(3) If the net retail price (excluding the excise tax and the value-added tax) is Five pesos (P5.00)
but does not exceed Six pesos and fifty centavos (P6.50) per pack, the tax shall be Five pesos and
sixty centavos (P5.60) per pack;
(4) If the net retail price (excluding the excise tax and the value-added tax) is below Five pesos
(P5.00) per pack, the tax shall be One peso and twelve centavos (P1.12) per pack.

Variants of existing brands of cigarettes which are introduced in the domestic market after the
effectivity of this Act shall be taxed under the highest classification of any variant of that brand.

xxxx

New brands shall be classified according to their current net retail price.

For the above purpose, net retail price shall mean the price at which the cigarette is sold on retail
in 20 major supermarkets in Metro Manila (for brands of cigarettes marketed nationally),
excluding the amount intended to cover the applicable excise tax and the value-added tax. For
brands which are marketed only outside Metro Manila, the net retail price shall mean the price at
which the cigarette is sold in five major supermarkets in the region excluding the amount intended
to cover the applicable excise tax and the value-added tax.

The classification of each brand of cigarettes based on its average net retail price as of October 1,
1996, as set forth in Annex "D" of this Act, shall remain in force until revised by Congress.
(Emphasis supplied)

As such, new brands of cigarettes shall be taxed according to their current net retail price while
existing or "old" brands shall be taxed based on their net retail price as of October 1, 1996.

To implement RA 8240, the Bureau of Internal Revenue (BIR) issued Revenue Regulations No. 1-
97,2 which classified the existing brands of cigarettes as those duly registered or active brands
prior to January 1, 1997. New brands, or those registered after January 1, 1997, shall be initially
assessed at their suggested retail price until such time that the appropriate survey to determine
their current net retail price is conducted. Pertinent portion of the regulations reads –

SECTION 2. Definition of Terms.

xxxx

3. Duly registered or existing brand of cigarettes – shall include duly registered, existing or active
brands of cigarettes, prior to January 1, 1997.

xxxx

6. New Brands – shall mean brands duly registered after January 1, 1997 and shall include duly
registered, inactive brands of cigarette not sold in commercial quantity before January 1, 1997.

Section 4. Classification and Manner of Taxation of Existing Brands, New Brands and Variant of
Existing Brands.
xxxx

B. New Brand

New brands shall be classified according to their current net retail price. In the meantime that the
current net retail price has not yet been established, the suggested net retail price shall be used to
determine the specific tax classification. Thereafter, a survey shall be conducted in 20 major
supermarkets or retail outlets in Metro Manila (for brands of cigarette marketed nationally) or in
five (5) major supermarkets or retail outlets in the region (for brands which are marketed only
outside Metro Manila) at which the cigarette is sold on retail in reams/cartons, three (3) months
after the initial removal of the new brand to determine the actual net retail price excluding the
excise tax and value added tax which shall then be the basis in determining the specific tax
classification. In case the current net retail price is higher than the suggested net retail price, the
former shall prevail. Any difference in specific tax due shall be assessed and collected inclusive of
increments as provided for by the National Internal Revenue Code, as amended.

In June 2001, petitioner British American Tobacco introduced into the market Lucky Strike Filter,
Lucky Strike Lights and Lucky Strike Menthol Lights cigarettes, with a suggested retail price of
P9.90 per pack.3 Pursuant to Sec. 145 (c) quoted above, the Lucky Strike brands were initially
assessed the excise tax at P8.96 per pack.

On February 17, 2003, Revenue Regulations No. 9-2003,4 amended Revenue Regulations No. 1-
97 by providing, among others, a periodic review every two years or earlier of the current net
retail price of new brands and variants thereof for the purpose of establishing and updating their
tax classification, thus:

For the purpose of establishing or updating the tax classification of new brands and variant(s)
thereof, their current net retail price shall be reviewed periodically through the conduct of survey
or any other appropriate activity, as mentioned above, every two (2) years unless earlier ordered
by the Commissioner. However, notwithstanding any increase in the current net retail price, the
tax classification of such new brands shall remain in force until the same is altered or changed
through the issuance of an appropriate Revenue Regulations.

Pursuant thereto, Revenue Memorandum Order No. 6-20035 was issued on March 11, 2003,
prescribing the guidelines and procedures in establishing current net retail prices of new brands of
cigarettes and alcohol products.

Subsequently, Revenue Regulations No. 22-20036 was issued on August 8, 2003 to implement the
revised tax classification of certain new brands introduced in the market after January 1, 1997,
based on the survey of their current net retail price. The survey revealed that Lucky Strike Filter,
Lucky Strike Lights, and Lucky Strike Menthol Lights, are sold at the current net retail price of
P22.54, P22.61 and P21.23, per pack, respectively.7 Respondent Commissioner of the Bureau of
Internal Revenue thus recommended the applicable tax rate of P13.44 per pack inasmuch as Lucky
Strike’s average net retail price is above P10.00 per pack.

Thus, on September 1, 2003, petitioner filed before the Regional Trial Court (RTC) of Makati,
Branch 61, a petition for injunction with prayer for the issuance of a temporary restraining order
(TRO) and/or writ of preliminary injunction, docketed as Civil Case No. 03-1032. Said petition
sought to enjoin the implementation of Section 145 of the NIRC, Revenue Regulations Nos. 1-97,
9-2003, 22-2003 and Revenue Memorandum Order No. 6-2003 on the ground that they
discriminate against new brands of cigarettes, in violation of the equal protection and uniformity
provisions of the Constitution.

Respondent Commissioner of Internal Revenue filed an Opposition8 to the application for the
issuance of a TRO. On September 4, 2003, the trial court denied the application for TRO, holding
that the courts have no authority to restrain the collection of taxes.9 Meanwhile, respondent
Secretary of Finance filed a Motion to Dismiss,10 contending that the petition is premature for
lack of an actual controversy or urgent necessity to justify judicial intervention.

In an Order dated March 4, 2004, the trial court denied the motion to dismiss and issued a writ of
preliminary injunction to enjoin the implementation of Revenue Regulations Nos. 1-97, 9-2003,
22-2003 and Revenue Memorandum Order No. 6-2003.11 Respondents filed a Motion for
Reconsideration12 and Supplemental Motion for Reconsideration.13 At the hearing on the said
motions, petitioner and respondent Commissioner of Internal Revenue stipulated that the only
issue in this case is the constitutionality of the assailed law, order, and regulations.14

On May 12, 2004, the trial court rendered a decision15 upholding the constitutionality of Section
145 of the NIRC, Revenue Regulations Nos. 1-97, 9-2003, 22-2003 and Revenue Memorandum
Order No. 6-2003. The trial court also lifted the writ of preliminary injunction. The dispositive
portion of the decision reads:

WHEREFORE, premises considered, the instant Petition is hereby DISMISSED for lack of merit.
The Writ of Preliminary Injunction previously issued is hereby lifted and dissolved.

SO ORDERED.16

Petitioner brought the instant petition for review directly with this Court on a pure question of law.

While the petition was pending, RA 9334 (An Act Increasing The Excise Tax Rates Imposed on
Alcohol And Tobacco Products, Amending For The Purpose Sections 131, 141, 143, 144, 145 and
288 of the NIRC of 1997, As Amended), took effect on January 1, 2005. The statute, among
others,–

(1) increased the excise tax rates provided in paragraph (c) of Section 145;

(2) mandated that new brands of cigarettes shall initially be classified according to their suggested
net retail price, until such time that their correct tax bracket is finally determined under a specified
period and, after which, their classification shall remain in force until revised by Congress;

(3) retained Annex "D" as tax base of those surveyed as of October 1, 1996 including the
classification of brands for the same products which, although not set forth in said Annex "D,"
were registered on or before January 1, 1997 and were being commercially produced and
marketed on or after October 1, 1996, and which continue to be commercially produced and
marketed after the effectivity of this Act. Said classification shall remain in force until revised by
Congress; and

(4) provided a legislative freeze on brands of cigarettes introduced between the period January 2,
199717 to December 31, 2003, such that said cigarettes shall remain in the classification under
which the BIR has determined them to belong as of December 31, 2003, until revised by
Congress.

Pertinent portions, of RA 9334, provides:

SEC. 145. Cigars and Cigarettes. –

xxxx

(C) Cigarettes Packed by Machine. – There shall be levied, assessed and collected on cigarettes
packed by machine a tax at the rates prescribed below:

(1) If the net retail price (excluding the excise tax and the value-added tax) is below Five pesos
(P5.00) per pack, the tax shall be:

Effective on January 1, 2005, Two pesos (P2.00) per pack;

Effective on January 1, 2007, Two pesos and twenty-three centavos (P2.23) per pack;

Effective on January 1, 2009, Two pesos and forty-seven centavos (P2.47) per pack; and

Effective on January 1, 2011, Two pesos and seventy-two centavos (P2.72) per pack.

(2) If the net retail price (excluding the excise tax and the value-added tax) is Five pesos (P5.00)
but does not exceed Six pesos and fifty centavos (P6.50) per pack, the tax shall be:

Effective on January 1, 2005, Six pesos and thirty-five centavos (P6.35) per pack;

Effective on January 1, 2007, Six pesos and seventy-four centavos (P6.74) per pack;

Effective on January 1, 2009, Seven pesos and fourteen centavos (P7.14) per pack; and

Effective on January 1, 2011, Seven pesos and fifty-six centavos (P7.56) per pack.
(3) If the net retail price (excluding the excise tax and the value-added tax) exceeds Six pesos and
fifty centavos (P6.50) but does not exceed Ten pesos (P10.00) per pack, the tax shall be:

Effective on January 1, 2005, Ten pesos and thirty-five centavos (10.35) per pack;

Effective on January 1, 2007, Ten pesos and eighty-eight centavos (P10.88) per pack;

Effective on January 1, 2009, Eleven pesos and forty-three centavos (P11.43) per pack; and

Effective on January 1, 2011, Twelve pesos (P12.00) per pack.

(4) If the net retail price (excluding the excise tax and the value-added tax) is above Ten pesos
(P10.00) per pack, the tax shall be:

Effective on January 1, 2005, Twenty-five pesos (P25.00) per pack;

Effective on January 1, 2007, Twenty-six pesos and six centavos (P26.06) per pack;

Effective on January 1, 2009, Twenty-seven pesos and sixteen centavos (P27.16) per pack; and

Effective on January 1, 2011, Twenty-eight pesos and thirty centavos (P28.30) per pack.

xxxx

New brands, as defined in the immediately following paragraph, shall initially be classified
according to their suggested net retail price.

New brands shall mean a brand registered after the date of effectivity of R.A. No. 8240.

Suggested net retail price shall mean the net retail price at which new brands, as defined above, of
locally manufactured or imported cigarettes are intended by the manufacturer or importer to be
sold on retail in major supermarkets or retail outlets in Metro Manila for those marketed
nationwide, and in other regions, for those with regional markets. At the end of three (3) months
from the product launch, the Bureau of Internal Revenue shall validate the suggested net retail
price of the new brand against the net retail price as defined herein and determine the correct tax
bracket under which a particular new brand of cigarette, as defined above, shall be classified. After
the end of eighteen (18) months from such validation, the Bureau of Internal Revenue shall
revalidate the initially validated net retail price against the net retail price as of the time of
revalidation in order to finally determine the correct tax bracket under which a particular new
brand of cigarettes shall be classified; Provided however, That brands of cigarettes introduced in
the domestic market between January 1, 1997 [should be January 2, 1997] and December 31, 2003
shall remain in the classification under which the Bureau of Internal Revenue has determined them
to belong as of December 31, 2003. Such classification of new brands and brands introduced
between January 1, 1997 and December 31, 2003 shall not be revised except by an act of
Congress.

Net retail price, as determined by the Bureau of Internal Revenue through a price survey to be
conducted by the Bureau of Internal Revenue itself, or the National Statistics Office when
deputized for the purpose by the Bureau of Internal Revenue, shall mean the price at which the
cigarette is sold in retail in at least twenty (20) major supermarkets in Metro Manila (for brands of
cigarettes marketed nationally), excluding the amount intended to cover the applicable excise tax
and the value-added tax. For brands which are marketed only outside Metro Manila, the "net retail
price" shall mean the price at which the cigarette is sold in at least five (5) major supermarkets in
the region excluding the amount intended to cover the applicable excise tax and value-added tax.

The classification of each brand of cigarettes based on its average net retail price as of October 1,
1996, as set forth in Annex "D", including the classification of brands for the same products
which, although not set forth in said Annex "D", were registered and were being commercially
produced and marketed on or after October 1, 1996, and which continue to be commercially
produced and marketed after the effectivity of this Act, shall remain in force until revised by
Congress. (Emphasis added)

Under RA 9334, the excise tax due on petitioner’s products was increased to P25.00 per pack. In
the implementation thereof, respondent Commissioner assessed petitioner’s importation of
911,000 packs of Lucky Strike cigarettes at the increased tax rate of P25.00 per pack, rendering it
liable for taxes in the total sum of P22,775,000.00.18

Hence, petitioner filed a Motion to Admit Attached Supplement19 and a Supplement20 to the
petition for review, assailing the constitutionality of RA 9334 insofar as it retained Annex "D" and
praying for a downward classification of Lucky Strike products at the bracket taxable at P8.96 per
pack. Petitioner contended that the continued use of Annex "D" as the tax base of existing brands
of cigarettes gives undue protection to said brands which are still taxed based on their price as of
October 1996 notwithstanding that they are now sold at the same or even at a higher price than
new brands like Lucky Strike. Thus, old brands of cigarettes such as Marlboro and Philip Morris
which, like Lucky Strike, are sold at or more than P22.00 per pack, are taxed at the rate of P10.88
per pack, while Lucky Strike products are taxed at P26.06 per pack.

In its Comment to the supplemental petition, respondents, through the Office of the Solicitor
General (OSG), argued that the passage of RA 9334, specifically the provision imposing a
legislative freeze on the classification of cigarettes introduced into the market between January 2,
1997 and December 31, 2003, rendered the instant petition academic. The OSG claims that the
provision in Section 145, as amended by RA 9334, prohibiting the reclassification of cigarettes
introduced during said period, "cured’ the perceived defect of Section 145 considering that, like
the cigarettes under Annex "D," petitioner’s brands and other brands introduced between January
2, 1997 and December 31, 2003, shall remain in the classification under which the BIR has placed
them and only Congress has the power to reclassify them.
On March 20, 2006, Philip Morris Philippines Manufacturing Incorporated filed a Motion for
Leave to Intervene with attached Comment-in-Intervention.21 This was followed by the Motions
for Leave to Intervene of Fortune Tobacco Corporation,22 Mighty Corporation, 23 and JT
International, S.A., with their respective Comments-in-Intervention. The Intervenors claim that
they are parties-in-interest who stand to be affected by the ruling of the Court on the
constitutionality of Section 145 of the NIRC and its Annex "D" because they are manufacturers of
cigarette brands which are included in the said Annex. Hence, their intervention is proper since the
protection of their interest cannot be addressed in a separate proceeding.

According to the Intervenors, no inequality exists because cigarettes classified by the BIR based
on their net retail price as of December 31, 2003 now enjoy the same status quo provision that
prevents the BIR from reclassifying cigarettes included in Annex "D." It added that the Court has
no power to pass upon the wisdom of the legislature in retaining Annex "D" in RA 9334; and that
the nullification of said Annex would bring about tremendous loss of revenue to the government,
chaos in the collection of taxes, illicit trade of cigarettes, and cause decline in cigarette demand to
the detriment of the farmers who depend on the tobacco industry.

Intervenor Fortune Tobacco further contends that petitioner is estopped from questioning the
constitutionality of Section 145 and its implementing rules and regulations because it entered into
the cigarette industry fully aware of the existing tax system and its consequences. Petitioner
imported cigarettes into the country knowing that its suggested retail price, which will be the
initial basis of its tax classification, will be confirmed and validated through a survey by the BIR
to determine the correct tax that would be levied on its cigarettes.

Moreover, Fortune Tobacco claims that the challenge to the validity of the BIR issuances should
have been brought by petitioner before the Court of Tax Appeals (CTA) and not the RTC because
it is the CTA which has exclusive appellate jurisdiction over decisions of the BIR in tax disputes.

On August 7, 2006, the OSG manifested that it interposes no objection to the motions for
intervention.24 Therefore, considering the substantial interest of the intervenors, and in the higher
interest of justice, the Court admits their intervention.

Before going into the substantive issues of this case, we must first address the matter of
jurisdiction, in light of Fortune Tobacco’s contention that petitioner should have brought its
petition before the Court of Tax Appeals rather than the regional trial court.

The jurisdiction of the Court of Tax Appeals is defined in Republic Act No. 1125, as amended by
Republic Act No. 9282. Section 7 thereof states, in pertinent part:

Sec. 7. Jurisdiction. — The CTA shall exercise:

a. Exclusive appellate jurisdiction to review by appeal, as herein provided:

1. Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments,


refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other
matters arising under the National Internal Revenue or other laws administered by the Bureau of
Internal Revenue;

2. Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments,


refunds of internal revenue taxes, fees or other charges, penalties in relations thereto, or other
matters arising under the National Internal Revenue Code or other laws administered by the
Bureau of Internal Revenue, where the National Internal Revenue Code provides a specific period
of action, in which case the inaction shall be deemed a denial; xxx.25

While the above statute confers on the CTA jurisdiction to resolve tax disputes in general, this
does not include cases where the constitutionality of a law or rule is challenged. Where what is
assailed is the validity or constitutionality of a law, or a rule or regulation issued by the
administrative agency in the performance of its quasi-legislative function, the regular courts have
jurisdiction to pass upon the same. The determination of whether a specific rule or set of rules
issued by an administrative agency contravenes the law or the constitution is within the
jurisdiction of the regular courts. Indeed, the Constitution vests the power of judicial review or the
power to declare a law, treaty, international or executive agreement, presidential decree, order,
instruction, ordinance, or regulation in the courts, including the regional trial courts. This is within
the scope of judicial power, which includes the authority of the courts to determine in an
appropriate action the validity of the acts of the political departments. Judicial power includes the
duty of the courts of justice to settle actual controversies involving rights which are legally
demandable and enforceable, and to determine whether or not there has been a grave abuse of
discretion amounting to lack or excess of jurisdiction on the part of any branch or instrumentality
of the Government.26

In Drilon v. Lim,27 it was held:

We stress at the outset that the lower court had jurisdiction to consider the constitutionality of
Section 187, this authority being embraced in the general definition of the judicial power to
determine what are the valid and binding laws by the criterion of their conformity to the
fundamental law. Specifically, B.P. 129 vests in the regional trial courts jurisdiction over all civil
cases in which the subject of the litigation is incapable of pecuniary estimation, even as the
accused in a criminal action has the right to question in his defense the constitutionality of a law
he is charged with violating and of the proceedings taken against him, particularly as they
contravene the Bill of Rights. Moreover, Article X, Section 5(2), of the Constitution vests in the
Supreme Court appellate jurisdiction over final judgments and orders of lower courts in all cases
in which the constitutionality or validity of any treaty, international or executive agreement, law,
presidential decree, proclamation, order, instruction, ordinance, or regulation is in question.

The petition for injunction filed by petitioner before the RTC is a direct attack on the
constitutionality of Section 145(C) of the NIRC, as amended, and the validity of its implementing
rules and regulations. In fact, the RTC limited the resolution of the subject case to the issue of the
constitutionality of the assailed provisions. The determination of whether the assailed law and its
implementing rules and regulations contravene the Constitution is within the jurisdiction of
regular courts. The Constitution vests the power of judicial review or the power to declare a law,
treaty, international or executive agreement, presidential decree, order, instruction, ordinance, or
regulation in the courts, including the regional trial courts.28 Petitioner, therefore, properly filed
the subject case before the RTC.

We come now to the issue of whether petitioner is estopped from assailing the authority of the
Commissioner of Internal Revenue. Fortune Tobacco raises this objection by pointing out that
when petitioner requested the Commissioner for a ruling that its Lucky Strike Soft Pack cigarettes
was a "new brand" rather than a variant of an existing brand, and thus subject to a lower specific
tax rate, petitioner executed an undertaking to comply with the procedures under existing
regulations for the assessment of deficiency internal revenue taxes.

Fortune Tobacco argues that petitioner, after invoking the authority of the Commissioner of
Internal Revenue, cannot later on turn around when the ruling is adverse to it.

Estoppel, an equitable principle rooted in natural justice, prevents persons from going back on
their own acts and representations, to the prejudice of others who have relied on them.29 The
principle is codified in Article 1431 of the Civil Code, which provides:

Through estoppel, an admission or representation is rendered conclusive upon the person making
it and cannot be denied or disproved as against the person relying thereon.

Estoppel can also be found in Rule 131, Section 2 (a) of the Rules of Court, viz:

Sec. 2. Conclusive presumptions. — The following are instances of conclusive presumptions:

(a) Whenever a party has by his own declaration, act or omission, intentionally and deliberately
led another to believe a particular thing true, and to act upon such belief, he cannot, in any
litigation arising out of such declaration, act or omission be permitted to falsify it.

The elements of estoppel are: first, the actor who usually must have knowledge, notice or
suspicion of the true facts, communicates something to another in a misleading way, either by
words, conduct or silence; second, the other in fact relies, and relies reasonably or justifiably, upon
that communication; third, the other would be harmed materially if the actor is later permitted to
assert any claim inconsistent with his earlier conduct; and fourth, the actor knows, expects or
foresees that the other would act upon the information given or that a reasonable person in the
actor's position would expect or foresee such action.30

In the early case of Kalalo v. Luz,31 the elements of estoppel, as related to the party to be
estopped, are: (1) conduct amounting to false representation or concealment of material facts; or at
least calculated to convey the impression that the facts are other than, and inconsistent with, those
which the party subsequently attempts to assert; (2) intent, or at least expectation that this conduct
shall be acted upon by, or at least influence, the other party; and (3) knowledge, actual or
constructive, of the real facts.

We find that petitioner was not guilty of estoppel. When it made the undertaking to comply with
all issuances of the BIR, which at that time it considered as valid, petitioner did not commit any
false misrepresentation or misleading act. Indeed, petitioner cannot be faulted for initially
undertaking to comply with, and subjecting itself to the operation of Section 145(C), and only
later on filing the subject case praying for the declaration of its unconstitutionality when the
circumstances change and the law results in what it perceives to be unlawful discrimination. The
mere fact that a law has been relied upon in the past and all that time has not been attacked as
unconstitutional is not a ground for considering petitioner estopped from assailing its validity. For
courts will pass upon a constitutional question only when presented before it in bona fide cases for
determination, and the fact that the question has not been raised before is not a valid reason for
refusing to allow it to be raised later.32

Now to the substantive issues.

To place this case in its proper context, we deem it necessary to first discuss how the assailed law
operates in order to identify, with precision, the specific provisions which, according to petitioner,
have created a grossly discriminatory classification scheme between old and new brands. The
pertinent portions of RA 8240, as amended by RA 9334, are reproduced below for ready
reference:

SEC. 145. Cigars and Cigarettes. –

xxxx

(C) Cigarettes Packed by Machine. – There shall be levied, assessed and collected on cigarettes
packed by machine a tax at the rates prescribed below:

(1) If the net retail price (excluding the excise tax and the value-added tax) is below Five pesos
(P5.00) per pack, the tax shall be:

Effective on January 1, 2005, Two pesos (P2.00) per pack;

Effective on January 1, 2007, Two pesos and twenty-three centavos (P2.23) per pack;

Effective on January 1, 2009, Two pesos and forty-seven centavos (P2.47) per pack; and

Effective on January 1, 2011, Two pesos and seventy-two centavos (P2.72) per pack.

(2) If the net retail price (excluding the excise tax and the value-added tax) is Five pesos (P5.00)
but does not exceed Six pesos and fifty centavos (P6.50) per pack, the tax shall be:

Effective on January 1, 2005, Six pesos and thirty-five centavos (P6.35) per pack;
Effective on January 1, 2007, Six pesos and seventy-four centavos (P6.74) per pack;

Effective on January 1, 2009, Seven pesos and fourteen centavos (P7.14) per pack; and

Effective on January 1, 2011, Seven pesos and fifty-six centavos (P7.56) per pack.

(3) If the net retail price (excluding the excise tax and the value-added tax) exceeds Six pesos and
fifty centavos (P6.50) but does not exceed Ten pesos (P10.00) per pack, the tax shall be:

Effective on January 1, 2005, Ten pesos and thirty-five centavos (10.35) per pack;

Effective on January 1, 2007, Ten pesos and eighty-eight centavos (P10.88) per pack;

Effective on January 1, 2009, Eleven pesos and forty-three centavos (P11.43) per pack; and

Effective on January 1, 2011, Twelve pesos (P12.00) per pack.

(4) If the net retail price (excluding the excise tax and the value-added tax) is above Ten pesos
(P10.00) per pack, the tax shall be:

Effective on January 1, 2005, Twenty-five pesos (P25.00) per pack;

Effective on January 1, 2007, Twenty-six pesos and six centavos (P26.06) per pack;

Effective on January 1, 2009, Twenty-seven pesos and sixteen centavos (P27.16) per pack; and

Effective on January 1, 2011, Twenty-eight pesos and thirty centavos (P28.30) per pack.

xxxx

New brands, as defined in the immediately following paragraph, shall initially be classified
according to their suggested net retail price.

New brands shall mean a brand registered after the date of effectivity of R.A. No. 8240.

Suggested net retail price shall mean the net retail price at which new brands, as defined above, of
locally manufactured or imported cigarettes are intended by the manufacturer or importer to be
sold on retail in major supermarkets or retail outlets in Metro Manila for those marketed
nationwide, and in other regions, for those with regional markets. At the end of three (3) months
from the product launch, the Bureau of Internal Revenue shall validate the suggested net retail
price of the new brand against the net retail price as defined herein and determine the correct tax
bracket under which a particular new brand of cigarette, as defined above, shall be classified. After
the end of eighteen (18) months from such validation, the Bureau of Internal Revenue shall
revalidate the initially validated net retail price against the net retail price as of the time of
revalidation in order to finally determine the correct tax bracket under which a particular new
brand of cigarettes shall be classified; Provided however, That brands of cigarettes introduced in
the domestic market between January 1, 1997 [should be January 2, 1997] and December 31, 2003
shall remain in the classification under which the Bureau of Internal Revenue has determined them
to belong as of December 31, 2003. Such classification of new brands and brands introduced
between January 1, 1997 and December 31, 2003 shall not be revised except by an act of
Congress.

Net retail price, as determined by the Bureau of Internal Revenue through a price survey to be
conducted by the Bureau of Internal Revenue itself, or the National Statistics Office when
deputized for the purpose by the Bureau of Internal Revenue, shall mean the price at which the
cigarette is sold in retail in at least twenty (20) major supermarkets in Metro Manila (for brands of
cigarettes marketed nationally), excluding the amount intended to cover the applicable excise tax
and the value-added tax. For brands which are marketed only outside Metro Manila, the "net retail
price" shall mean the price at which the cigarette is sold in at least five (5) major supermarkets in
the region excluding the amount intended to cover the applicable excise tax and value-added tax.

The classification of each brand of cigarettes based on its average net retail price as of October 1,
1996, as set forth in Annex "D", including the classification of brands for the same products
which, although not set forth in said Annex "D", were registered and were being commercially
produced and marketed on or after October 1, 1996, and which continue to be commercially
produced and marketed after the effectivity of this Act, shall remain in force until revised by
Congress.

As can be seen, the law creates a four-tiered system which we may refer to as the low-priced,33
medium-priced,34 high-priced,35 and premium-priced36 tax brackets. When a brand is introduced
in the market, the current net retail price is determined through the aforequoted specified
procedure. The current net retail price is then used to classify under which tax bracket the brand
belongs in order to finally determine the corresponding excise tax rate on a per pack basis. The
assailed feature of this law pertains to the mechanism where, after a brand is classified based on its
current net retail price, the classification is frozen and only Congress can thereafter reclassify the
same. From a practical point of view, Annex "D" is merely a by-product of the whole mechanism
and philosophy of the assailed law. That is, the brands under Annex "D" were also classified based
on their current net retail price, the only difference being that they were the first ones so classified
since they were the only brands surveyed as of October 1, 1996, or prior to the effectivity of RA
8240 on January 1, 1997.37

Due to this legislative classification scheme, it is possible that over time the net retail price of a
previously classified brand, whether it be a brand under Annex "D" or a new brand classified after
the effectivity of RA 8240 on January 1, 1997, would increase (due to inflation, increase of
production costs, manufacturer’s decision to increase its prices, etc.) to a point that its net retail
price pierces the tax bracket to which it was previously classified.38 Consequently, even if its
present day net retail price would make it fall under a higher tax bracket, the previously classified
brand would continue to be subject to the excise tax rate under the lower tax bracket by virtue of
the legislative classification freeze.

Petitioner claims that this is what happened in 2004 to the Marlboro and Philip Morris brands,
which were permanently classified under Annex "D." As of October 1, 1996, Marlboro had net
retail prices ranging from P6.78 to P6.84 while Philip Morris had net retail prices ranging from
P7.39 to P7.48. Thus, pursuant to RA 8240,39 Marlboro and Philip Morris were classified under
the high-priced tax bracket and subjected to an excise tax rate of P8.96 per pack. Petitioner then
presented evidence showing that after the lapse of about seven years or sometime in 2004,
Marlboro’s and Philip Morris’ net retail prices per pack both increased to about P15.59.40 This
meant that they would fall under the premium-priced tax bracket, with a higher excise tax rate of
P13.44 per pack,41 had they been classified based on their 2004 net retail prices. However, due to
the legislative classification freeze, they continued to be classified under the high-priced tax
bracket with a lower excise tax rate. Petitioner thereafter deplores the fact that its Lucky Strike
Filter, Lucky Strike Lights, and Lucky Strike Menthol Lights cigarettes, introduced in the market
sometime in 2001 and validated by a BIR survey in 2003, were found to have net retail prices of
P11.53, P11.59 and P10.34,42 respectively, which are lower than those of Marlboro and Philip
Morris. However, since petitioner’s cigarettes were newly introduced brands in the market, they
were taxed based on their current net retail prices and, thus, fall under the premium-priced tax
bracket with a higher excise tax rate of P13.44 per pack. This unequal tax treatment between
Marlboro and Philip Morris, on the one hand, and Lucky Strike, on the other, is the crux of
petitioner’s contention that the legislative classification freeze violates the equal protection and
uniformity of taxation clauses of the Constitution.

It is apparent that, contrary to its assertions, petitioner is not only questioning the undue favoritism
accorded to brands under Annex "D," but the entire mechanism and philosophy of the law which
freezes the tax classification of a cigarette brand based on its current net retail price. Stated
differently, the alleged discrimination arising from the legislative classification freeze between the
brands under Annex "D" and petitioner’s newly introduced brands arose only because the former
were classified based on their "current" net retail price as of October 1, 1996 and petitioner’s
newly introduced brands were classified based on their "current" net retail price as of 2003.
Without this corresponding freezing of the classification of petitioner’s newly introduced brands
based on their current net retail price, it would be impossible to establish that a disparate tax
treatment occurred between the Annex "D" brands and petitioner’s newly introduced brands.

This clarification is significant because, under these circumstances, a declaration of


unconstitutionality would necessarily entail nullifying the whole mechanism of the law and not
just Annex "D." Consequently, if the assailed law is declared unconstitutional on equal protection
grounds, the entire method by which a brand of cigarette is classified would have to be
invalidated. As a result, no method to classify brands under Annex "D" as well as new brands
would be left behind and the whole Section 145 of the NIRC, as amended, would become
inoperative.43

To simplify the succeeding discussions, we shall refer to the whole mechanism and philosophy of
the assailed law which freezes the tax classification of a cigarette brand based on its current net
retail price and which, thus, produced different classes of brands based on the time of their
introduction in the market (starting with the brands in Annex "D" since they were the first brands
so classified as of October 1, 1996) as the classification freeze provision.44

As thus formulated, the central issue is whether or not the classification freeze provision violates
the equal protection and uniformity of taxation clauses of the Constitution.

In Sison, Jr. v. Ancheta,45 this Court, through Chief Justice Fernando, explained the applicable
standard in deciding equal protection and uniformity of taxation challenges:

Now for equal protection. The applicable standard to avoid the charge that there is a denial of this
constitutional mandate whether the assailed act is in the exercise of the police power or the power
of eminent domain is to demonstrate "that the governmental act assailed, far from being inspired
by the attainment of the common weal was prompted by the spirit of hostility, or at the very least,
discrimination that finds no support in reason. It suffices then that the laws operate equally and
uniformly on all persons under similar circumstances or that all persons must be treated in the
same manner, the conditions not being different, both in the privileges conferred and the liabilities
imposed. Favoritism and undue preference cannot be allowed. For the principle is that equal
protection and security shall be given to every person under circumstances, which if not identical
are analogous. If law be looks upon in terms of burden or charges, those that fall within a class
should be treated in the same fashion, whatever restrictions cast on some in the group equally
binding on the rest." That same formulation applies as well to taxation measures. The equal
protection clause is, of course, inspired by the noble concept of approximating the ideal of the
laws's benefits being available to all and the affairs of men being governed by that serene and
impartial uniformity, which is of the very essence of the idea of law. There is, however, wisdom,
as well as realism, in these words of Justice Frankfurter: "The equality at which the 'equal
protection' clause aims is not a disembodied equality. The Fourteenth Amendment enjoins 'the
equal protection of the laws,' and laws are not abstract propositions. They do not relate to abstract
units A, B and C, but are expressions of policy arising out of specific difficulties, addressed to the
attainment of specific ends by the use of specific remedies. The Constitution does not require
things which are different in fact or opinion to be treated in law as though they were the same."
Hence the constant reiteration of the view that classification if rational in character is allowable.
As a matter of fact, in a leading case of Lutz v. Araneta, this Court, through Justice J.B.L. Reyes,
went so far as to hold "at any rate, it is inherent in the power to tax that a state be free to select the
subjects of taxation, and it has been repeatedly held that 'inequalities which result from a singling
out of one particular class for taxation, or exemption infringe no constitutional limitation.'"

Petitioner likewise invoked the kindred concept of uniformity. According to the Constitution: "The
rule of taxation shall be uniform and equitable." This requirement is met according to Justice
Laurel in Philippine Trust Company v. Yatco, decided in 1940, when the tax "operates with the
same force and effect in every place where the subject may be found." He likewise added: "The
rule of uniformity does not call for perfect uniformity or perfect equality, because this is hardly
attainable." The problem of classification did not present itself in that case. It did not arise until
nine years later, when the Supreme Court held: "Equality and uniformity in taxation means that all
taxable articles or kinds of property of the same class shall be taxed at the same rate. The taxing
power has the authority to make reasonable and natural classifications for purposes of taxation, . . .
As clarified by Justice Tuason, where "the differentiation" complained of "conforms to the
practical dictates of justice and equity" it "is not discriminatory within the meaning of this clause
and is therefore uniform." There is quite a similarity then to the standard of equal protection for all
that is required is that the tax "applies equally to all persons, firms and corporations placed in
similar situation."46 (Emphasis supplied)

In consonance thereto, we have held that "in our jurisdiction, the standard and analysis of equal
protection challenges in the main have followed the ‘rational basis’ test, coupled with a deferential
attitude to legislative classifications and a reluctance to invalidate a law unless there is a showing
of a clear and unequivocal breach of the Constitution."47 Within the present context of tax
legislation on sin products which neither contains a suspect classification nor impinges on a
fundamental right, the rational-basis test thus finds application. Under this test, a legislative
classification, to survive an equal protection challenge, must be shown to rationally further a
legitimate state interest.48 The classifications must be reasonable and rest upon some ground of
difference having a fair and substantial relation to the object of the legislation.49 Since every law
has in its favor the presumption of constitutionality, the burden of proof is on the one attacking the
constitutionality of the law to prove beyond reasonable doubt that the legislative classification is
without rational basis.50 The presumption of constitutionality can be overcome only by the most
explicit demonstration that a classification is a hostile and oppressive discrimination against
particular persons and classes, and that there is no conceivable basis which might support it.51

A legislative classification that is reasonable does not offend the constitutional guaranty of the
equal protection of the laws. The classification is considered valid and reasonable provided that:
(1) it rests on substantial distinctions; (2) it is germane to the purpose of the law; (3) it applies, all
things being equal, to both present and future conditions; and (4) it applies equally to all those
belonging to the same class.52

The first, third and fourth requisites are satisfied. The classification freeze provision was inserted
in the law for reasons of practicality and expediency. That is, since a new brand was not yet in
existence at the time of the passage of RA 8240, then Congress needed a uniform mechanism to
fix the tax bracket of a new brand. The current net retail price, similar to what was used to classify
the brands under Annex "D" as of October 1, 1996, was thus the logical and practical choice.
Further, with the amendments introduced by RA 9334, the freezing of the tax classifications now
expressly applies not just to Annex "D" brands but to newer brands introduced after the effectivity
of RA 8240 on January 1, 1997 and any new brand that will be introduced in the future.53
(However, as will be discussed later, the intent to apply the freezing mechanism to newer brands
was already in place even prior to the amendments introduced by RA 9334 to RA 8240.) This does
not explain, however, why the classification is "frozen" after its determination based on current net
retail price and how this is germane to the purpose of the assailed law. An examination of the
legislative history of RA 8240 provides interesting answers to this question.
RA 8240 was the first of three parts in the Comprehensive Tax Reform Package then being pushed
by the Ramos Administration. It was enacted with the following objectives stated in the
Sponsorship Speech of Senator Juan Ponce Enrile (Senator Enrile), viz:

First, to evolve a tax structure which will promote fair competition among the players in the
industries concerned and generate buoyant and stable revenue for the government.

Second, to ensure that the tax burden is equitably distributed not only amongst the industries
affected but equally amongst the various levels of our society that are involved in various markets
that are going to be affected by the excise tax on distilled spirits, fermented liquor, cigars and
cigarettes.

In the case of firms engaged in the industries producing the products that we are about to tax, this
means relating the tax burden to their market share, not only in terms of quantity, Mr. President,
but in terms of value.

In case of consumers, this will mean evolving a multi-tiered rate structure so that low-priced
products are subject to lower tax rates and higher-priced products are subject to higher tax rates.

Third, to simplify the tax administration and compliance with the tax laws that are about to unfold
in order to minimize losses arising from inefficiencies and tax avoidance scheme, if not outright
tax evasion.54

In the initial stages of the crafting of the assailed law, the Department of Finance (DOF)
recommended to Congress a shift from the then existing ad valorem taxation system to a specific
taxation system with respect to sin products, including cigarettes. The DOF noted that the ad
valorem taxation system was a source of massive tax leakages because the taxpayer was able to
evade paying the correct amount of taxes through the undervaluation of the price of cigarettes
using various marketing arms and dummy corporations. In order to address this problem, the DOF
proposed a specific taxation system where the cigarettes would be taxed based on volume or on a
per pack basis which was believed to be less susceptible to price manipulation. The reason was
that the BIR would only need to monitor the sales volume of cigarettes, from which it could easily
compute the corresponding tax liability of cigarette manufacturers. Thus, the DOF suggested the
use of a three-tiered system which operates in substantially the same manner as the four-tiered
system under RA 8240 as earlier discussed. The proposal of the DOF was embodied in House Bill
(H.B.) No. 6060, the pertinent portions of which states—

SEC. 142. Cigars and cigarettes.—

(c) Cigarettes packed by machine.— There shall be levied, assessed and collected on cigarettes
packed by machine a tax at the rates prescribed below:

(1) If the manufacturer’s or importer’s wholesale price (net of excise tax and value-added tax) per
pack exceeds four pesos and twenty centavos (P4.20), the tax shall be seven pesos and fifty
centavos (P7.50);

(2) If the manufacturer’s or importer’s wholesale price (net of excise tax and value-added tax) per
pack exceeds three pesos and ninety centavos (P3.90) but does not exceed four pesos and twenty
centavos (P4.20), the tax shall be five pesos and fifty centavos (P5.50): provided, that after two (2)
years from the effectivity of this Act, cigarettes otherwise subject to tax under this subparagraph
shall be taxed under subparagraph (1) above.

(3) If the manufacturer’s or importer’s wholesale price (net of excise tax and value-added tax) per
pack does not exceeds three pesos and ninety centavos (P3.90), the tax rate shall be one peso
(P1.00).

Variants of existing brands and new brands of cigarettes packed by machine to be introduced in
the domestic market after the effectivity of this Act, shall be taxed under paragraph (c)(1) hereof.

The rates of specific tax on cigars and cigarettes under paragraphs (a), (b), and (c) hereof,
including the price levels for purposes of classifying cigarettes packed by machine, shall be
revised upward two (2) years after the effectivity of this Act and every two years thereafter by the
Commissioner of Internal Revenue, subject to the approval of the Secretary of Finance, taking into
account the movement of the consumer price index for cigars and cigarettes as established by the
National Statistics Office: provided, that the increase in taxes and/or price levels shall be equal to
the present change in such consumer price index for the two-year period: provided, further, that
the President, upon the recommendation of the Secretary of Finance, may suspend or defer the
adjustment in price levels and tax rates when the interest of the national economy and general
welfare so require, such as the need to obviate unemployment, and economic and social
dislocation: provided, finally, that the revised price levels and tax rates authorized herein shall in
all cases be rounded off to the nearest centavo and shall be in force and effect on the date of
publication thereof in a newspaper of general circulation. x x x (Emphasis supplied)

What is of particular interest with respect to the proposal of the DOF is that it contained a
provision for the periodic adjustment of the excise tax rates and tax brackets, and a corresponding
periodic resurvey and reclassification of cigarette brands based on the increase in the consumer
price index as determined by the Commissioner of Internal Revenue subject to certain guidelines.
The evident intent was to prevent inflation from eroding the value of the excise taxes that would
be collected from cigarettes over time by adjusting the tax rate and tax brackets based on the
increase in the consumer price index. Further, under this proposal, old brands as well as new
brands introduced thereafter would be subjected to a resurvey and reclassification based on their
respective values at the end of every two years in order to align them with the adjustment of the
excise tax rate and tax brackets due to the movement in the consumer price index.55

Of course, we now know that the DOF proposal, insofar as the periodic adjustment of tax rates
and tax brackets, and the periodic resurvey and reclassification of cigarette brands are concerned,
did not gain approval from Congress. The House and Senate pushed through with their own
versions of the excise tax system on beers and cigarettes both denominated as H.B. No. 7198. For
convenience, we shall refer to the bill deliberated upon by the House as the House Version and
that of the Senate as the Senate Version.

The House’s Committee on Ways and Means, then chaired by Congressman Exequiel B. Javier
(Congressman Javier), roundly rejected the DOF proposal. Instead, in its Committee Report
submitted to the plenary, it proposed a different excise tax system which used a specific tax as a
basic tax with an ad valorem comparator. Further, it deleted the proposal to have a periodic
adjustment of tax rates and the tax brackets as well as periodic resurvey and reclassification of
cigarette brands, to wit:

The rigidity of the specific tax system calls for the need for frequent congressional intervention to
adjust the tax rates to inflation and to keep pace with the expanding needs of government for more
revenues. The DOF admits this flaw inherent in the tax system it proposed. Hence, to obviate the
need for remedial legislation, the DOF is asking Congress to grant to the Commissioner the power
to revise, one, the specific tax rates: and two, the price levels of beer and cigarettes. What the DOF
is asking, Mr. Speaker, is for Congress to delegate to the Commissioner of Internal Revenue the
power to fix the tax rates and classify the subjects of taxation based on their price levels for
purposes of fixing the tax rates. While we sympathize with the predicament of the DOF, it is not
for Congress to abdicate such power. The power sought to be delegated to be exercised by the
Commissioner of Internal Revenue is a legislative power vested by the Constitution in Congress
pursuant to Section 1, Article VI of the Constitution. Where the power is vested, there it must
remain— in Congress, a body of representatives elected by the people. Congress may not delegate
such power, much less abdicate it.

xxxx

Moreover, the grant of such power, if at all constitutionally permissible, to the Commissioner of
Internal Revenue is fraught with ethical implications. The debates on how much revenue will be
raised, how much money will be taken from the pockets of taxpayers, will inexorably shift from
the democratic Halls of Congress to the secret and non-transparent corridors of unelected agencies
of government, the Department of Finance and the Bureau of Internal Revenue, which are not
accountable to our people. We cannot countenance the shift for ethical reasons, lest we be accused
of betraying the trust reposed on this Chamber by the people. x x x

A final point on this proposal, Mr. Speaker, is the exercise of the taxing power of the
Commissioner of Internal Revenue which will be triggered by inflation rates based on the
consumer price index. Simply stated, Mr. Speaker, the specific tax rates will be fixed by the
Commissioner depending on the price levels of beers and cigarettes as determined by the
consumers’ price index. This is a novel idea, if not necessarily weird in the field of taxation. What
if the brewer or the cigarette manufacturer sells at a price below the consumers’ price index? Will
it be taxed on the basis of the consumer’s price index which is over and above its wholesale or
retail price as the case may be? This is a weird form of exaction where the tax is based not on what
the brewer or manufacturer actually realized but on an imaginary wholesale or retail price. This
amounts to a taxation based on presumptive price levels and renders the specific tax a presumptive
tax. We hope, the DOF and the BIR will also honor a presumptive tax payment.

Moreover, specific tax rates based on price levels tied to consumer’s price index as proposed by
the DOF engenders anti-trust concerns. The proposal if enacted into law will serve as a barrier to
the entry of new players in the beer and cigarette industries which are presently dominated by
shared monopolies. A new player in these industries will be denied business flexibility to fix its
price levels to promote its product and penetrate the market as the price levels are dictated by the
consumer price index. The proposed tax regime, Mr. Speaker, will merely enhance the
stranglehold of the oligopolies in the beer and cigarette industries, thus, reversing the
government’s policy of dismantling monopolies and combinations in restraint of trade.56

For its part, the Senate’s Committee on Ways and Means, then chaired by Senator Juan Ponce
Enrile (Senator Enrile), developed its own version of the excise tax system on cigarettes. The
Senate Version consisted of a four-tiered system and, interestingly enough, contained a periodic
excise tax rate and tax bracket adjustment as well as a periodic resurvey and reclassification of
brands provision ("periodic adjustment and reclassification provision," for brevity) to be
conducted by the DOF in coordination with the BIR and the National Statistics Office based on
the increase in the consumer price index— similar to the one proposed by the DOF, viz:

SEC. 4 Section 142 of the National Internal Revenue Code, as amended, is hereby further
amended to read as follows:

"SEC. 142. Cigars and cigarettes. –

xxxx

(c) Cigarettes packed by machine. – There shall be levied, assessed and collected on cigarettes
packed by machine a tax at the rates prescribed below:

(1) If the net retail price (excluding the excise tax and the value-added tax) is above Ten pesos
(P10.00) per pack, the tax shall be Twelve pesos (P12.00) per pack;

(2) If the net retail price (excluding the excise tax and the value-added tax) exceeds Six pesos and
fifty centavos (P6.50) per pack, the tax shall be Eight pesos (P8.00) per pack;

(3) If the net retail price (excluding the excise tax and the value-added tax) is Five pesos (P5.00)
up to Six pesos and fifty centavos (P6.50) per pack, the tax shall be Five pesos (P5.00) per pack;

(4) If the net retail price (excluding the excise tax and the value-added tax) is below Five pesos
(P5.00) per pack, the tax shall be One peso (P1.00) per pack.

Variants of existing brands of cigarettes which are introduced in the domestic market after the
effectivity of this Act shall be taxed under the highest classification of any variant of that brand.
xxx

The rates of specific tax on cigars and cigarettes under subparagraph (a), (b) and (c) hereof,
including the net retail prices for purposes of classification, shall be adjusted on the sixth of
January three years after the effectivity of this Act and every three years thereafter. The adjustment
shall be in accordance with the inflation rate measured by the average increase in the consumer
price index over the three-year period. The adjusted tax rates and net price levels shall be in force
on the eighth of January.

Within the period hereinabove mentioned, the Secretary of Finance shall direct the conduct of a
survey of retail prices of each brand of cigarettes in coordination with the Bureau of Internal
Revenue and the National Statistics Office.

For purposes of this Section, net retail price shall mean the price at which the cigarette is sold on
retail in 20 major supermarkets in Metro Manila (for brands of cigarettes marketed nationally),
excluding the amount intended to cover the applicable excise tax and the value-added tax. For
brands which are marketed only outside Metro Manila, the net retail price shall mean the price at
which the cigarette is sold in five major supermarkets in the region excluding the amount intended
to cover the applicable excise tax and the value-added tax.

The classification of each brand of cigarettes in the initial year of implementation of this Act shall
be based on its average net retail price as of October 1, 1996. The said classification by brand shall
remain in force until January 7, 2000.

New brands shall be classified according to their current net retail price.57 (Emphasis supplied)

During the period of interpellations, the late Senator Raul S. Roco (Senator Roco) expressed
doubts as to the legality and wisdom of putting a periodic adjustment and reclassification
provision:

Senator Enrile: This will be the first time that a tax burden will be allowed to be automatically
adjusted upwards based on a system of indexing tied up with the Consumers Price Index (CPI).
Although I must add that we have adopted a similar system in adjusting the personal tax
exemption from income tax of our individual taxpayers.

Senator Roco: They are not exactly the same, Mr. President. But even then, we do note that this
the first time we are trying to put an automatic adjustment. My concern is, why do we propose
now this automatic adjustment? What is the reason that impels the committee? Maybe we can be
enlightened and maybe we shall embrace it forthwith. But what is the reason?

Senator Enrile: Mr. President, we will recall that in the House of Representatives, it has adopted a
tax proposal on these products based on a specific tax as a basic tax with an ad valorem
comparator. The Committee on Ways and Means of the Senate has not seen it fit to adopt this
system, but it recognized the possibility that there may be an occasion where the price movement
in the country might unwarrantedly move upwards, in which case, if we peg the government to a
specific tax rate of P6.30, P9.30 and P12.30 for beer, since we are talking of beer, 58 the
government might lose in the process.

In order to consider the interest of the government in this, Mr. President, and in order to obviate
the possibility that some of these products categorized under the different tiers with different
specific tax rates from moving upwards and piercing their own tiers and thereby expose
themselves to an incremental tax of higher magnitude, it was felt that we should adopt a system
where, in spite of any escalation in the price of these products in the future, the tax rates could be
adjusted upwards so that none of these products would leave their own tier. That was the basic
principle under which we crafted this portion of the tax proposal.

Senator Roco: Mr. President, we certainly share the judgment of the distinguished gentleman as
regards the comparator provision in the House of Representatives and we appreciate the reasons
given. But we are under the impression that the House also, aside from the comparator, has an
adjustment clause that is fixed. It has fixed rates for the adjustment. So that one of the basic
differences between the Senate proposed version now and the House version is that, the House of
Representatives has manifested its will and judgment as regards the tax to which we will adjust,
whereas the Senate version relegates fundamentally that judgment to the Department of Finance.

Senator Enrile: That is correct, Mr. President, because we felt that in imposing a fixed adjustment,
we might be fixing an amount that is either too high or too low. We cannot foresee the economic
trends in this country over a period of two years, three years, let alone ten years. So we felt that a
mechanism ought to be adopted in order to serve the interest of the government, the interest of the
producers, and the interest of the consuming public.

Senator Roco: This is where, Mr. President, my policy difficulties start. Under the Constitution— I
think it is Article VI, Section 24, and it was the distinguished chairman of the Committee on Ways
and Means who made this Chamber very conscious of this provision— revenue measures and
tariff measures shall originate exclusively from the House of Representatives.

The reason for this, Mr. President, is, there is a long history why the House of Representatives
must originate judgments on tax. The House members represent specific districts. They represent
specific constituencies, and the whole history of parliamentarism, the whole history of Congress
as an institution is founded on the proposition that the direct representatives of the people must
speak about taxes.

Mr. President, while the Senate can concur and can introduce amendments, the proposed change
here is radical. This is the policy difficulty that I wish to clarify with the gentleman because the
judgment call now on the amount of tax to be imposed is not coming from Congress. It is shifted
to the Department of Finance. True, the Secretary of Finance may have been the best finance
officer two years ago and now the best finance officer in Asia, but that does not make him
qualified to replace the judgment call of the House of Representatives. That is my first difficulty.
Senator Enrile: Mr. President, precisely the law, in effect, authorizes this rate beforehand. The
computation of the rate is the only thing that was left to the Department of Finance as a tax
implementor of Congress. This is not unusual because we have already, as I said, adopted a system
similar to this. If we adjust the personal exemption of an individual taxpayer, we are in effect
adjusting the applicable tax rate to him.

Senator Roco: But the point I was trying to demonstrate, Mr. President, is that we depart precisely
from the mandate of the Constitution that judgment on revenue must emanate from Congress.
Here, it is shifted to the Department of Finance for no visible or patent reason insofar as I could
understand. The only difference is, who will make the judgment? Should it be Congress?

Senator Enrile: Mr. President, forgive me for answering sooner than I should. My understanding
of the Constitution is that all revenue measures must emanate from the House. That is all the
Constitution says.

Now, it does not say that the judgment call must belong to the House. The judgment call can
belong both to the House and to the Senate. We can change whatever proposal the House did.
Precisely, we are now crafting a measure, and we are saying that this is the rate subject to an
adjustment which we also provide. We are not giving any unusual power to the Secretary of
Finance because we tell him, "This is the formula that you must adopt in arriving at the adjustment
so that you do not have to come back to us."59

Apart from his doubts as to the legality of the delegation of taxing power to the DOF and BIR,
Senator Roco also voiced out his concern about the possible abuse and corruption that will arise
from the periodic adjustment and reclassification provision. Continuing—

Senator Roco: Mr. President, if that is the argument, that the distinguished gentleman has a
different legal interpretation, we will then now examine the choice. Because his legal
interpretation is different from mine, then the issues becomes: Is it more advantageous that this
judgment be exercised by the House? Should we not concur or modify in terms of the exercise by
the House of its power or are we better off giving this judgment call to the Department of
Finance?

Let me now submit, Mr. President, that in so doing, it is more advantageous to fix the rate so that
even if we modify the rates identified by Congress, it is better and less susceptible to abuse.

For instance, Mr. President, would the gentlemen wish to demonstrate to us how this will be done?
On page 8, lines 5 to 9, there is a provision here as to when the Secretary of Finance shall direct
the conduct of survey of retail prices of each brand of fermented liquor in coordination with the
Bureau of Internal Revenue and the National Statistics Office.

These offices are not exactly noted, Mr. President, for having been sanctified by the Holy Spirit in
their noble intentions. x x x60 (Emphasis supplied)
Pressing this point, Senator Roco continued his query:

Senator Roco: x x x [On page 8, lines 5 to 9] it says that during the two-year period, the Secretary
of Finance shall direct the conduct of the survey. How? When? Which retail prices and what brand
shall he consider? When he coordinates with the Bureau of Internal Revenue, what is the Bureau
of Internal Revenue supposed to be doing? What is the National Statistics Office supposed to be
doing, and under what guides and standards?

May the gentleman wish to demonstrate how this will be done? My point, Mr. President, is, by
giving the Secretary of Finance, the BIR and the National Statistics Office discretion over a two-
year period will invite corruption and arbitrariness, which is more dangerous than letting the
House of Representatives and this Chamber set the adjustment rate. Why not set the adjustment
rate? Why should Congress not exercise that judgment now? x x x

Senator Enrile: x x x

Senator Roco: x x x We respectfully submit that the Chairman consider choosing the judgment of
this Chamber and the House of Representatives over a delegated judgment of the Department of
Finance.

Again, it is not to say that I do not trust the Department of Finance. It has won awards, and I also
trust the undersecretary. But that is beside the point. Tomorrow, they may not be there.61
(Emphasis supplied)

This point was further dissected by the two senators. There was a genuine difference of opinion as
to which system— one with a fixed excise tax rate and classification or the other with a periodic
adjustment of excise tax rate and reclassification— was less susceptible to abuse, as the following
exchanges show:

Senator Enrile: Mr. President, considering the sensitivity of these products from the viewpoint of
exerted pressures because of the understandable impact of this measure on the pockets of the
major players producing these products, the committee felt that perhaps to lessen such pressures, it
is best that we now establish a norm where the tax will be adjusted without incurring too much
political controversy as has happened in the case of this proposal.

Senator Roco: But that is exactly the same reason we say we must rely upon Congress because
Congress, if it is subjected to pressure, at least balances off because of political factors.

When the Secretary of Finance is now subjected to pressure, are we saying that the Secretary of
Finance and the Department of Finance is better-suited to withstand the pressure? Or are we
saying "Let the Finance Secretary decide whom to yield"?

I am saying that the temptation and the pressure on the Secretary of Finance is more dangerous
and more corruption-friendly than ascertaining for ourselves now a fixed rate of increase for a
fixed period.

Senator Enrile: Mr. President, perhaps the gentleman may not agree with this representation, but in
my humble opinion, this formulation is less susceptible to pressure because there is a definite
point of reference which is the consumer price index, and that consumer price index is not going
to be used only for this purpose. The CPI is used for a national purpose, and there is less
possibility of tinkering with it.62

Further, Senator Roco, like Congressman Javier, expressed the view that the periodic adjustment
and reclassification provision would create an anti-competitive atmosphere. Again, Senators Roco
and Enrile had genuine divergence of opinions on this matter, to wit:

Senator Roco: x x x On the marketing level, an adjustment clause may, in fact, be disadvantageous
to both companies, whether it is the Lucio Tan companies or the San Miguel companies. If we
have to adjust our marketing position every two years based on the adjustment clause, the
established company may survive, but the new ones will have tremendous difficulty. Therefore,
this provision tends to indicate an anticompetitive bias.

It is good for San Miguel and the Lucio Tan companies, but the new companies— assuming there
may be new companies and we want to encourage them because of the old point of liberalization
— will be at a disadvantage under this situation. If this observation will find receptivity in the
policy consideration of the distinguished Gentleman, maybe we can also further, later on, seek
amendments to this automatic adjustment clause in some manner.

Senator Enrile: Mr. President, I cannot foresee any anti-competitiveness of this provision with
respect to a new entrant, because a new entrant will not just come in without studying the market.
He is a lousy businessman if he will just come in without studying the market. If he comes in, he
will determine at what retail price level he will market his product, and he will be coming under
any of the tiers depending upon his net retail price. Therefore, I do not see how this particular
provision will affect a new entrant.

Senator Roco: Be that as it may, Mr. President, we obviously will not resort to debate until this
evening, and we will have to look for other ways of resolving the policy options.

Let me just close that particular area of my interpellation, by summarizing the points we were
hoping could be clarified.

1. That the automatic adjustment clause is at best questionable in law.

2. It is corruption-friendly in the sense that it shifts the discretion from the House of
Representatives and this Chamber to the Secretary of Finance, no matter how saintly he may be.

3. There is,— although the judgment call of the gentleman disagrees— to our view, an
anticompetitive situation that is geared at…63
After these lengthy exchanges, it appears that the views of Senator Enrile were sustained by the
Senate Body because the Senate Version was passed on Third Reading without substantially
altering the periodic adjustment and reclassification provision.

It was actually at the Bicameral Conference Committee level where the Senate Version underwent
major changes. The Senate Panel prevailed upon the House Panel to abandon the basic excise tax
rate and ad valorem comparator as the means to determine the applicable excise tax rate. Thus, the
Senate’s four-tiered system was retained with minor adjustments as to the excise tax rate per tier.
However, the House Panel prevailed upon the Senate Panel to delete the power of the DOF and
BIR to periodically adjust the excise tax rate and tax brackets, and periodically resurvey and
reclassify the cigarette brands based on the increase in the consumer price index.

In lieu thereof, the classification of existing brands based on their average net retail price as of
October 1, 1996 was "frozen" and a fixed across-the-board 12% increase in the excise tax rate of
each tier after three years from the effectivity of the Act was put in place. There is a dearth of
discussion in the deliberations as to the applicability of the freezing mechanism to new brands
after their classification is determined based on their current net retail price. But a plain reading of
the text of RA 8240, even before its amendment by RA 9334, as well as the previously discussed
deliberations would readily lead to the conclusion that the intent of Congress was to likewise
apply the freezing mechanism to new brands. Precisely, Congress rejected the proposal to allow
the DOF and BIR to periodically adjust the excise tax rate and tax brackets as well as to
periodically resurvey and reclassify cigarettes brands which would have encompassed old and new
brands alike. Thus, it would be absurd for us to conclude that Congress intended to allow the
periodic reclassification of new brands by the BIR after their classification is determined based on
their current net retail price. We shall return to this point when we tackle the second issue.

In explaining the changes made at the Bicameral Conference Committee level, Senator Enrile, in
his report to the Senate plenary, noted that the fixing of the excise tax rates was done to avoid
confusion.64 Congressman Javier, for his part, reported to the House plenary the reasons for fixing
the excise tax rate and freezing the classification, thus:

Finally, this twin feature, Mr. Speaker, fixed specific tax rates and frozen classification, rejects the
Senate version which seeks to abdicate the power of Congress to tax by pegging the rates as well
as the classification of sin products to consumer price index which practically vests in the
Secretary of Finance the power to fix the rates and to classify the products for tax purposes.65
(Emphasis supplied)

Congressman Javier later added that the frozen classification was intended to give stability to the
industry as the BIR would be prevented from tinkering with the classification since it would
remain unchanged despite the increase in the net retail prices of the previously classified
brands.66 This would also assure the industry players that there would be no new impositions as
long as the law is unchanged.67
From the foregoing, it is quite evident that the classification freeze provision could hardly be
considered arbitrary, or motivated by a hostile or oppressive attitude to unduly favor older brands
over newer brands. Congress was unequivocal in its unwillingness to delegate the power to
periodically adjust the excise tax rate and tax brackets as well as to periodically resurvey and
reclassify the cigarette brands based on the increase in the consumer price index to the DOF and
the BIR. Congress doubted the constitutionality of such delegation of power, and likewise,
considered the ethical implications thereof. Curiously, the classification freeze provision was put
in place of the periodic adjustment and reclassification provision because of the belief that the
latter would foster an anti-competitive atmosphere in the market. Yet, as it is, this same criticism is
being foisted by petitioner upon the classification freeze provision.

To our mind, the classification freeze provision was in the main the result of Congress’s earnest
efforts to improve the efficiency and effectivity of the tax administration over sin products while
trying to balance the same with other state interests. In particular, the questioned provision
addressed Congress’s administrative concerns regarding delegating too much authority to the DOF
and BIR as this will open the tax system to potential areas for abuse and corruption. Congress may
have reasonably conceived that a tax system which would give the least amount of discretion to
the tax implementers would address the problems of tax avoidance and tax evasion.

To elaborate a little, Congress could have reasonably foreseen that, under the DOF proposal and
the Senate Version, the periodic reclassification of brands would tempt the cigarette manufacturers
to manipulate their price levels or bribe the tax implementers in order to allow their brands to be
classified at a lower tax bracket even if their net retail prices have already migrated to a higher tax
bracket after the adjustment of the tax brackets to the increase in the consumer price index.
Presumably, this could be done when a resurvey and reclassification is forthcoming. As briefly
touched upon in the Congressional deliberations, the difference of the excise tax rate between the
medium-priced and the high-priced tax brackets under RA 8240, prior to its amendment, was
P3.36. For a moderately popular brand which sells around 100 million packs per year, this easily
translates to P336,000,000.68 The incentive for tax avoidance, if not outright tax evasion, would
clearly be present. Then again, the tax implementers may use the power to periodically adjust the
tax rate and reclassify the brands as a tool to unduly oppress the taxpayer in order for the
government to achieve its revenue targets for a given year.

Thus, Congress sought to, among others, simplify the whole tax system for sin products to remove
these potential areas of abuse and corruption from both the side of the taxpayer and the
government. Without doubt, the classification freeze provision was an integral part of this overall
plan. This is in line with one of the avowed objectives of the assailed law "to simplify the tax
administration and compliance with the tax laws that are about to unfold in order to minimize
losses arising from inefficiencies and tax avoidance scheme, if not outright tax evasion."69 RA
9334 did not alter this classification freeze provision of RA 8240. On the contrary, Congress
affirmed this freezing mechanism by clarifying the wording of the law. We can thus reasonably
conclude, as the deliberations on RA 9334 readily show, that the administrative concerns in tax
administration, which moved Congress to enact the classification freeze provision in RA 8240,
were merely continued by RA 9334. Indeed, administrative concerns may provide a legitimate,
rational basis for legislative classification.70 In the case at bar, these administrative concerns in
the measurement and collection of excise taxes on sin products are readily apparent as afore-
discussed.

Aside from the major concern regarding the elimination of potential areas for abuse and corruption
from the tax administration of sin products, the legislative deliberations also show that the
classification freeze provision was intended to generate buoyant and stable revenues for
government. With the frozen tax classifications, the revenue inflow would remain stable and the
government would be able to predict with a greater degree of certainty the amount of taxes that a
cigarette manufacturer would pay given the trend in its sales volume over time. The reason for this
is that the previously classified cigarette brands would be prevented from moving either upward or
downward their tax brackets despite the changes in their net retail prices in the future and, as a
result, the amount of taxes due from them would remain predictable. The classification freeze
provision would, thus, aid in the revenue planning of the government.71

All in all, the classification freeze provision addressed Congress’s administrative concerns in the
simplification of tax administration of sin products, elimination of potential areas for abuse and
corruption in tax collection, buoyant and stable revenue generation, and ease of projection of
revenues. Consequently, there can be no denial of the equal protection of the laws since the
rational-basis test is amply satisfied.

Going now to the contention of petitioner that the classification freeze provision unduly favors
older brands over newer brands, we must first contextualize the basis of this claim. As previously
discussed, the evidence presented by the petitioner merely showed that in 2004, Marlboro and
Philip Morris, on the one hand, and Lucky Strike, on the other, would have been taxed at the same
rate had the classification freeze provision been not in place. But due to the operation of the
classification freeze provision, Lucky Strike was taxed higher. From here, petitioner generalizes
that this differential tax treatment arising from the classification freeze provision adversely
impacts the fairness of the playing field in the industry, particularly, between older and newer
brands. Thus, it is virtually impossible for new brands to enter the market.

Petitioner did not, however, clearly demonstrate the exact extent of such impact. It has not been
shown that the net retail prices of other older brands previously classified under this classification
system have already pierced their tax brackets, and, if so, how this has affected the overall
competition in the market. Further, it does not necessarily follow that newer brands cannot
compete against older brands because price is not the only factor in the market as there are other
factors like consumer preference, brand loyalty, etc. In other words, even if the newer brands are
priced higher due to the differential tax treatment, it does not mean that they cannot compete in the
market especially since cigarettes contain addictive ingredients so that a consumer may be willing
to pay a higher price for a particular brand solely due to its unique formulation. It may also be
noted that in 2003, the BIR surveyed 29 new brands72 that were introduced in the market after the
effectivity of RA 8240 on January 1, 1997, thus negating the sweeping generalization of petitioner
that the classification freeze provision has become an insurmountable barrier to the entry of new
brands. Verily, where there is a claim of breach of the due process and equal protection clauses,
considering that they are not fixed rules but rather broad standards, there is a need for proof of
such persuasive character as would lead to such a conclusion. Absent such a showing, the
presumption of validity must prevail.73

Be that as it may, petitioner’s evidence does suggest that, at least in 2004, Philip Morris and
Marlboro, older brands, would have been taxed at the same rate as Lucky Strike, a newer brand,
due to certain conditions (i.e., the increase of the older brands’ net retail prices beyond the tax
bracket to which they were previously classified after the lapse of some time) were it not for the
classification freeze provision. It may be conceded that this has adversely affected, to a certain
extent, the ability of petitioner to competitively price its newer brands vis-à-vis the subject older
brands. Thus, to a limited extent, the assailed law seems to derogate one of its avowed objectives,
i.e. promoting fair competition among the players in the industry. Yet, will this occurrence, by
itself, render the assailed law unconstitutional on equal protection grounds?

We answer in the negative.

Whether Congress acted improvidently in derogating, to a limited extent, the state’s interest in
promoting fair competition among the players in the industry, while pursuing other state interests
regarding the simplification of tax administration of sin products, elimination of potential areas for
abuse and corruption in tax collection, buoyant and stable revenue generation, and ease of
projection of revenues through the classification freeze provision, and whether the questioned
provision is the best means to achieve these state interests, necessarily go into the wisdom of the
assailed law which we cannot inquire into, much less overrule. The classification freeze provision
has not been shown to be precipitated by a veiled attempt, or hostile attitude on the part of
Congress to unduly favor older brands over newer brands. On the contrary, we must reasonably
assume, owing to the respect due a co-equal branch of government and as revealed by the
Congressional deliberations, that the enactment of the questioned provision was impelled by an
earnest desire to improve the efficiency and effectivity of the tax administration of sin products.
For as long as the legislative classification is rationally related to furthering some legitimate state
interest, as here, the rational-basis test is satisfied and the constitutional challenge is perfunctorily
defeated.

We do not sit in judgment as a supra-legislature to decide, after a law is passed by Congress,


which state interest is superior over another, or which method is better suited to achieve one, some
or all of the state’s interests, or what these interests should be in the first place. This policy-
determining power, by constitutional fiat, belongs to Congress as it is its function to determine and
balance these interests or choose which ones to pursue. Time and again we have ruled that the
judiciary does not settle policy issues. The Court can only declare what the law is and not what the
law should be. Under our system of government, policy issues are within the domain of the
political branches of government and of the people themselves as the repository of all state
power.74 Thus, the legislative classification under the classification freeze provision, after having
been shown to be rationally related to achieve certain legitimate state interests and done in good
faith, must, perforce, end our inquiry.
Concededly, the finding that the assailed law seems to derogate, to a limited extent, one of its
avowed objectives (i.e. promoting fair competition among the players in the industry) would
suggest that, by Congress’s own standards, the current excise tax system on sin products is
imperfect. But, certainly, we cannot declare a statute unconstitutional merely because it can be
improved or that it does not tend to achieve all of its stated objectives.75 This is especially true for
tax legislation which simultaneously addresses and impacts multiple state interests.76 Absent a
clear showing of breach of constitutional limitations, Congress, owing to its vast experience and
expertise in the field of taxation, must be given sufficient leeway to formulate and experiment
with different tax systems to address the complex issues and problems related to tax
administration. Whatever imperfections that may occur, the same should be addressed to the
democratic process to refine and evolve a taxation system which ideally will achieve most, if not
all, of the state’s objectives.

In fine, petitioner may have valid reasons to disagree with the policy decision of Congress and the
method by which the latter sought to achieve the same. But its remedy is with Congress and not
this Court. As succinctly articulated in Vance v. Bradley:77

The Constitution presumes that, absent some reason to infer antipathy, even improvident decisions
will eventually be rectified by the democratic process, and that judicial intervention is generally
unwarranted no matter how unwisely we may think a political branch has acted. Thus, we will not
overturn such a statute unless the varying treatment of different groups or persons is so unrelated
to the achievement of any combination of legitimate purposes that we can only conclude that the
legislature's actions were irrational.78

We now tackle the second issue.

Petitioner asserts that Revenue Regulations No. 1-97, as amended by Revenue Regulations No. 9-
2003, Revenue Regulations No. 22-2003 and Revenue Memorandum Order No. 6-2003, are
invalid insofar as they empower the BIR to reclassify or update the classification of new brands of
cigarettes based on their current net retail prices every two years or earlier. It claims that RA 8240,
even prior to its amendment by RA 9334, did not authorize the BIR to conduct said periodic
resurvey and reclassification.

The questioned provisions are found in the following sections of the assailed issuances:

(1) Section 4(B)(e)(c), 2nd paragraph of Revenue Regulations No. 1-97, as amended by Section 2
of Revenue Regulations 9-2003, viz:

For the purpose of establishing or updating the tax classification of new brands and variant(s)
thereof, their current net retail price shall be reviewed periodically through the conduct of survey
or any other appropriate activity, as mentioned above, every two (2) years unless earlier ordered
by the Commissioner. However, notwithstanding any increase in the current net retail price, the
tax classification of such new brands shall remain in force until the same is altered or changed
through the issuance of an appropriate Revenue Regulations.
(2) Sections II(1)(b), II(4)(b), II(6), II(7), III (Large Tax Payers Assistance Division II) II(b) of
Revenue Memorandum Order No. 6-2003, insofar as pertinent to cigarettes packed by machine,
viz:

II. POLICIES AND GUIDELINES

1. The conduct of survey covered by this Order, for purposes of determining the current retail
prices of new brands of cigarettes and alcohol products introduced in the market on or after
January 1, 1997, shall be undertaken in the following instances:

xxxx

b. For reclassification of new brands of said excisable products that were introduced in the market
after January 1, 1997.

xxxx

4. The determination of the current retail prices of new brands of the aforesaid excisable products
shall be initiated as follows:

xxxx

b. After the lapse of the prescribed two-year period or as the Commissioner may otherwise direct,
the appropriate tax reclassification of these brands based on the current net retail prices thereof
shall be determined by a survey to be conducted upon a written directive by the Commissioner.

For this purpose, a memorandum order to the Assistant Commissioner, Large Taxpayers Service,
Heads, Excise Tax Areas, and Regional Directors of all Revenue Regions, except Revenue Region
Nos. 4, 5, 6, 7, 8 and 9, shall be issued by the Commissioner for the submission of the list of major
supermarkets/retail outlets where the above excisable products are being sold, as well as the list of
selected revenue officers who shall be designated to conduct the said activity(ies).

xxxx

6. The results of the survey conducted in Revenue Region Nos. 4 to 9 shall be submitted directly
to the Chief, LT Assistance Division II (LTAD II), National Office for consolidation. On the other
hand, the results of the survey conducted in Revenue Regions other than Revenue Region Nos. 4
to 9, shall be submitted to the Office of the Regional Director for regional consolidation. The
consolidated regional survey, together with the accomplished survey forms shall be transmitted to
the Chief, LTAD II for national consolidation within three (3) days from date of actual receipt
from the survey teams. The LTAD II shall be responsible for the evaluation and analysis of the
submitted survey forms and the preparation of the recommendation for the updating/revision of
the tax classification of each brand of cigarettes and alcohol products. The said recommendation,
duly validated by the ACIR, LTS, shall be submitted to the Commissioner for final review within
ten (10) days from the date of actual receipt of complete reports from all the surveying Offices.

7. Upon final review by the Commissioner of the revised tax classification of the different new
brands of cigarettes and alcohol products, the appropriate revenue regulations shall be prepared
and submitted for approval by the Secretary of Finance.

xxxx

III. PROCEDURES

xxxx

Large Taxpayers Assistance Division II

xxxx

1. Perform the following preparatory procedures on the identification of brands to be surveyed,


supermarkets/retail outlets where the survey shall be conducted, and the personnel selected to
conduct the survey.

xxxx

b. On the tax reclassification of new brands

i. Submit a master list of registered brands covered by the survey pursuant to the provisions of
Item II.2 of this Order containing the complete description of each brand, existing net retail price
and the corresponding tax rate thereof.

ii. Submit to the ACIR, LTS, a list of major supermarkets/retail outlets within the territorial
jurisdiction of the concerned revenue regions where the survey will be conducted to be used as
basis in the issuance of Mission Orders. Ensure that the minimum number of establishments to be
surveyed, as prescribed under existing revenue laws and regulations, is complied with. In addition,
the names and designations of revenue officers selected to conduct the survey shall be clearly
indicated opposite the names of the establishments to be surveyed.

There is merit to the contention.

In order to implement RA 8240 following its effectivity on January 1, 1997, the BIR issued
Revenue Regulations No. 1-97, dated December 13, 1996, which mandates a one-time
classification only.79 Upon their launch, new brands shall be initially taxed based on their
suggested net retail price. Thereafter, a survey shall be conducted within three (3) months to
determine their current net retail prices and, thus, fix their official tax classifications. However, the
BIR made a turnaround by issuing Revenue Regulations No. 9-2003, dated February 17, 2003,
which partly amended Revenue Regulations No. 1-97, by authorizing the BIR to periodically
reclassify new brands (i.e., every two years or earlier) based on their current net retail prices.
Thereafter, the BIR issued Revenue Memorandum Order No. 6-2003, dated March 11, 2003,
prescribing the guidelines on the implementation of Revenue Regulations No. 9-2003. This was
patent error on the part of the BIR for being contrary to the plain text and legislative intent of RA
8240.

It is clear that the afore-quoted portions of Revenue Regulations No. 1-97, as amended by Section
2 of Revenue Regulations 9-2003, and Revenue Memorandum Order No. 6-2003 unjustifiably
emasculate the operation of Section 145 of the NIRC because they authorize the Commissioner of
Internal Revenue to update the tax classification of new brands every two years or earlier subject
only to its issuance of the appropriate Revenue Regulations, when nowhere in Section 145 is such
authority granted to the Bureau. Unless expressly granted to the BIR, the power to reclassify
cigarette brands remains a prerogative of the legislature which cannot be usurped by the former.

More importantly, as previously discussed, the clear legislative intent was for new brands to
benefit from the same freezing mechanism accorded to Annex "D" brands. To reiterate, in enacting
RA 8240, Congress categorically rejected the DOF proposal and Senate Version which would have
empowered the DOF and BIR to periodically adjust the excise tax rate and tax brackets, and to
periodically resurvey and reclassify cigarette brands. (This resurvey and reclassification would
have naturally encompassed both old and new brands.) It would thus, be absurd for us to conclude
that Congress intended to allow the periodic reclassification of new brands by the BIR after their
classification is determined based on their current net retail price while limiting the freezing of the
classification to Annex "D" brands. Incidentally, Senator Ralph G. Recto expressed the following
views during the deliberations on RA 9334, which later amended RA 8240:

Senator Recto: Because, like I said, when Congress agreed to adopt a specific tax system [under
R.A. 8240], when Congress did not index the brackets, and Congress did not index the rates but
only provided for a one rate increase in the year 2000, we shifted from ad valorem which was
based on value to a system of specific which is based on volume. Congress then, in effect,
determined the classification based on the prices at that particular period of time and classified
these products accordingly.

Of course, Congress then decided on what will happen to the new brands or variants of existing
brands. To favor government, a variant would be classified as the highest rate of tax for that
particular brand. In case of a new brand, Mr. President, then the BIR should classify them. But I
do not think it was the intention of Congress then to give the BIR the authority to reclassify them
every so often. I do not think it was the intention of Congress to allow the BIR to classify a new
brand every two years, for example, because it will be arbitrary for the BIR to do so. x x x80
(Emphasis supplied)

For these reasons, the amendments introduced by RA 9334 to RA 8240, insofar as the freezing
mechanism is concerned, must be seen merely as underscoring the legislative intent already in
place then, i.e. new brands as being covered by the freezing mechanism after their classification
based on their current net retail prices.

Unfortunately for petitioner, this result will not cause a downward reclassification of Lucky Strike.
It will be recalled that petitioner introduced Lucky Strike in June 2001. However, as admitted by
petitioner itself, the BIR did not conduct the required market survey within three months from
product launch. As a result, Lucky Strike was never classified based on its actual current net retail
price. Petitioner failed to timely seek redress to compel the BIR to conduct the requisite market
survey in order to fix the tax classification of Lucky Strike. In the meantime, Lucky Strike was
taxed based on its suggested net retail price of P9.90 per pack, which is within the high-priced tax
bracket. It was only after the lapse of two years or in 2003 that the BIR conducted a market survey
which was the first time that Lucky Strike’s actual current net retail price was surveyed and found
to be from P10.34 to P11.53 per pack, which is within the premium-priced tax bracket. The case of
petitioner falls under a situation where there was no reclassification based on its current net retail
price which would have been invalid as previously explained. Thus, we cannot grant petitioner’s
prayer for a downward reclassification of Lucky Strike because it was never reclassified by the
BIR based on its actual current net retail price.

It should be noted though that on August 8, 2003, the BIR issued Revenue Regulations No. 22-
2003 which implemented the revised tax classifications of new brands based on their current net
retail prices through the market survey conducted pursuant to Revenue Regulations No. 9-2003.
Annex "A" of Revenue Regulations No. 22-2003 lists the result of the market survey and the
corresponding recommended tax classification of the new brands therein aside from Lucky Strike.
However, whether these other brands were illegally reclassified based on their actual current net
retail prices by the BIR must be determined on a case-to-case basis because it is possible that these
brands were classified based on their actual current net retail price for the first time in the year
2003 just like Lucky Strike. Thus, we shall not make any pronouncement as to the validity of the
tax classifications of the other brands listed therein.

Finally, it must be noted that RA 9334 introduced changes in the manner by which the current net
retail price of a new brand is determined and how its classification is permanently fixed, to wit:

New brands, as defined in the immediately following paragraph, shall initially be classified
according to their suggested net retail price.

New brands shall mean a brand registered after the date of effectivity of R.A. No. 8240 [on
January 1, 1997].

Suggested net retail price shall mean the net retail price at which new brands, as defined above, of
locally manufactured or imported cigarettes are intended by the manufacture or importer to be sold
on retail in major supermarkets or retail outlets in Metro Manila for those marketed nationwide,
and in other regions, for those with regional markets. At the end of three (3) months from the
product launch, the Bureau of Internal Revenue shall validate the suggested net retail price of the
new brand against the net retail price as defined herein and determine the correct tax bracket under
which a particular new brand of cigarette, as defined above, shall be classified. After the end of
eighteen (18) months from such validation, the Bureau of Internal Revenue shall revalidate the
initially validated net retail price against the net retail price as of the time of revalidation in order
to finally determine the correct tax bracket under which a particular new brand of cigarettes shall
be classified; Provided however, That brands of cigarettes introduced in the domestic market
between January 1, 1997 and December 31, 2003 shall remain in the classification under which
the Bureau of Internal Revenue has determined them to belong as of December 31, 2003. Such
classification of new brands and brands introduced between January 1, 1997 and December 31,
2003 shall not be revised except by an act of Congress. (Emphasis supplied)

Thus, Revenue Regulations No. 9-2003 and Revenue Memorandum Order No. 6-2003 should be
deemed modified by the above provisions from the date of effectivity of RA 9334 on January 1,
2005.

In sum, Section 4(B)(e)(c), 2nd paragraph of Revenue Regulations No. 1-97, as amended by
Section 2 of Revenue Regulations 9-2003, and Sections II(1)(b), II(4)(b), II(6), II(7), III (Large
Tax Payers Assistance Division II) II(b) of Revenue Memorandum Order No. 6-2003, as pertinent
to cigarettes packed by machine, are invalid insofar as they grant the BIR the power to reclassify
or update the classification of new brands every two years or earlier. Further, these provisions are
deemed modified upon the effectivity of RA 9334 on January 1, 2005 insofar as the manner of
determining the permanent classification of new brands is concerned.

We now tackle the last issue.

Petitioner contends that RA 8240, as amended by RA 9334, and its implementing rules and
regulations violate the General Agreement on Tariffs and Trade (GATT) of 1947, as amended,
specifically, Paragraph 2, Article III, Part II:

2. The products of the territory of any contracting party imported into the territory of any other
contracting party shall not be subject, directly or indirectly, to internal taxes or other internal
charges of any kind in excess of those applied, directly or indirectly, to like domestic products.
Moreover, no contracting party shall otherwise apply internal taxes or other internal charges to
imported or domestic products in a manner contrary to the principles set forth in paragraph 1.

It claims that it is the duty of this Court to correct, in favor of the GATT, whatever inconsistency
exists between the assailed law and the GATT in order to prevent triggering the international
dispute settlement mechanism under the GATT-WTO Agreement.

We disagree.

The classification freeze provision uniformly applies to all newly introduced brands in the market,
whether imported or locally manufactured. It does not purport to single out imported cigarettes in
order to unduly favor locally produced ones. Further, petitioner’s evidence was anchored on the
alleged unequal tax treatment between old and new brands which involves a different frame of
reference vis-à-vis local and imported products. Petitioner has, therefore, failed to clearly prove its
case, both factually and legally, within the parameters of the GATT.

At any rate, even assuming arguendo that petitioner was able to prove that the classification freeze
provision violates the GATT, the outcome would still be the same. The GATT is a treaty duly
ratified by the Philippine Senate and under Article VII, Section 2181 of the Constitution, it merely
acquired the status of a statute.82 Applying the basic principles of statutory construction in case of
irreconcilable conflict between statutes, RA 8240, as amended by RA 9334, would prevail over the
GATT either as a later enactment by Congress or as a special law dealing with the taxation of sin
products. Thus, in Abbas v. Commission on Elections,83 we had occasion to explain:

Petitioners premise their arguments on the assumption that the Tripoli Agreement is part of the law
of the land, being a binding international agreement. The Solicitor General asserts that the Tripoli
Agreement is neither a binding treaty, not having been entered into by the Republic of the
Philippines with a sovereign state and ratified according to the provisions of the 1973 or 1987
Constitutions, nor a binding international agreement.

We find it neither necessary nor determinative of the case to rule on the nature of the Tripoli
Agreement and its binding effect on the Philippine Government whether under public international
or internal Philippine law. In the first place, it is now the Constitution itself that provides for the
creation of an autonomous region in Muslim Mindanao. The standard for any inquiry into the
validity of R.A. No. 6734 would therefore be what is so provided in the Constitution. Thus, any
conflict between the provisions of R.A. No. 6734 and the provisions of the Tripoli Agreement will
not have the effect of enjoining the implementation of the Organic Act. Assuming for the sake of
argument that the Tripoli Agreement is a binding treaty or international agreement, it would then
constitute part of the law of the land. But as internal law it would not be superior to R.A. No.
6734, an enactment of the Congress of the Philippines, rather it would be in the same class as the
latter [SALONGA, PUBLIC INTERNATIONAL LAW 320 (4th ed., 1974), citing Head Money
Cases, 112 U.S. 580 (1884) and Foster v. Nelson, 2 Pet. 253 (1829)]. Thus, if at all, R.A. No. 6734
would be amendatory of the Tripoli Agreement, being a subsequent law. Only a determination by
this Court that R.A. No. 6734 contravenes the Constitution would result in the granting of the
reliefs sought. (Emphasis supplied)

WHEREFORE, the petition is PARTIALLY GRANTED and the decision of the Regional Trial
Court of Makati, Branch 61, in Civil Case No. 03-1032, is AFFIRMED with MODIFICATION.
As modified, this Court declares that:

(1) Section 145 of the NIRC, as amended by Republic Act No. 9334, is CONSTITUTIONAL; and
that

(2) Section 4(B)(e)(c), 2nd paragraph of Revenue Regulations No. 1-97, as amended by Section 2
of Revenue Regulations 9-2003, and Sections II(1)(b), II(4)(b), II(6), II(7), III (Large Tax Payers
Assistance Division II) II(b) of Revenue Memorandum Order No. 6-2003, insofar as pertinent to
cigarettes packed by machine, are INVALID insofar as they grant the BIR the power to reclassify
or update the classification of new brands every two years or earlier.
SO ORDERED.

CONSUELO YNARES-SANTIAGO
Associate Justice

WE CONCUR:

REYNATO S. PUNO
Chief Justice

LEONARDO A. QUISUMBING
Associate Justice

ANTONIO T. CARPIO
Associate Justice

MA. ALICIA AUSTRIA-MARTINEZ


Associate Justice

RENATO C. CORONA
Associate Justice

CONCHITA CARPIO MORALES


Associate Justice

ADOLFO S. AZCUNA
Associate Justice

DANTE O. TINGA
Associate Justice

MINITA V. CHICO-NAZARIO
Associate Justice

PRESBITERO J. VELASCO, JR.


Associate Justice

ANTONIO EDUARDO B. NACHURA


Associate Justice

RUBEN T. REYES
Associate Justice
TERESITA J. LEONARDO-DE CASTRO
Associate Justice

ARTURO D. BRION
Associate Justice

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that the conclusions
in the above Decision were reached in consultation before the case was assigned to the writer of
the opinion of the Court.

REYNATO S. PUNO
Chief Justice

Footnotes

1 Based on the updated rates, effective January 1, 2000.

2 Rollo, pp. 50-113.

3 Annex "A," Revenue Regulations No. 22-2003.

4 Rollo, pp. 114-120.

5 Id. at 121-134.

6 Id. at 135.

7 Id. at 136.

8 Id. at 162-166.

9 Id. at 167-168.

10 Id. at 169-181.

11 Id. at 201-203.

12 Id. at 204-218.
13 Id. at 219-233.

14 Id. at 281.

15 Id. at 42-47.

16 Id. at 47; penned by Judge Romeo F. Barza.

17 New brands as defined are those introduced into the market after the effectivity of R.A. 8240
on January 1, 1997, meaning, on January 2, 1997; while existing brands for purposes of inclusion
in Annex "D" are those registered on or before January 1, 1997.

18 Id. at 828.

19 Id. at 805-814.

20 Id. at 818-836.

21 Id. at 912-952.

22 Id. at 992-1001.

23 Id. at 1116-1119.

24 Id. at 1157.

25 Republic Act No. 9282.

26 Smart Communications, Inc. v. National Telecommunications Commission, G.R. No. 151908,


August 12, 2003, 408 SCRA 678, 689.

27 G.R. No. 112497, August 4, 1994, 235 SCRA 135.

28 Smart Communications, Inc. v. National Telecommunications Commission, supra.

29 Philippine National Bank v. Palma, G.R. No. 157279, August 9, 2005, 466 SCRA 307, 324.

30 Philippine Bank of Communications v. Court of Appeals, 352 Phil. 1, 9 (1998).

31 G.R. No. L-27782, July 31, 1970, 34 SCRA 337, 347.

32 People v. Vera, 65 Phil. 56, 93 (1937).

33 If the net retail price (excluding the excise tax and the value-added tax) of a brand is below
Five pesos (P5.00) per pack.

34 If the net retail price (excluding the excise tax and the value-added tax) of a brand is Five pesos
(P5.00) but does not exceed Six pesos and fifty centavos (P6.50) per pack.

35 If the net retail price (excluding the excise tax and the value-added tax) of a brand exceeds Six
pesos and fifty centavos (P6.50) but does not exceed Ten pesos (P10.00) per pack.

36 If the net retail price (excluding the excise tax and the value-added tax) of a brand is above Ten
pesos (P10.00) per pack.

37 Upon the request of the Senate Committee on Ways and Means and prior to the effectivity of
R.A. 8240 on January 1, 1997, the BIR conducted a survey on the average net retail prices of
existing brands of cigarettes as of October 1, 1996 which is now embodied in Annex "D" and
which became the basis for determining the applicable specific excise tax rates of said brands.

38 The exception, of course, would be those brands classified under the premium-priced tax
bracket (or the highest tax bracket). No matter how high their net retail price increases in the
future, they would still remain in the premium-priced bracket. Further, the assumption is that the
norm in the future is inflation. If it were deflation, than the older brands would possibly be the
ones which would encounter a tax disadvantage after the lapse of some time.

39 SEC. 145. Cigars and cigarettes. –

xxxx

(c) Cigarettes packed by machine. – There shall be levied, assessed and collected on cigarettes
packed by machine a tax at the rates prescribed below: x x x

(2) If the net retail price (excluding the excise tax and the value-added tax) exceeds Six pesos and
fifty centavos (P6.50) but does not exceed Ten pesos (10.00) per pack, the tax shall be Eight pesos
and ninety-six centavos (P8.96) per pack; x x x

40 This was computed as follows: Net Retail Price (P15.59) = Gross Retail Price (P27.00)*-
Value-Added Tax (P2.45) – Excise Tax (8.96)

*The gross retail price was established through the receipt of purchase of Marlboro and Philip
Morris from a grocery store. (Exhibit "B," records, vol. II, p. 407. See also TSN, February 20,
2004, records, vol. II, pp. 614-617)

41 SEC. 145. Cigars and cigarettes. –

xxxx
(c) Cigarettes packed by machine. – There shall be levied, assessed and collected on cigarettes
packed by machine a tax at the rates prescribed below: x x x

(1) If the net retail price (excluding the excise tax and the value-added tax) is above Ten pesos
(P10.00) per pack, the tax shall be Thirteen pesos and forty-four centavos (P13.44) per pack;

42 Annex "A," Revenue Regulations No. 22-2003.

43 It may be argued that, perhaps, only the freezing mechanism of the law may be declared
unconstitutional so that the current net retail price can still be used to determine the corresponding
tax brackets of old and new brands. This becomes problematic since there is no guide as to when
or how frequent the current net retail prices shall be determined precisely because the freezing
mechanism assumes this function in the assailed law. This Court cannot fill this void that will be
created in the law; otherwise, it would be tantamount to judicial legislation. In short, the freezing
mechanism is an integral and indispensable part of the classification scheme devised by Congress,
without which, it cannot function. Thus, the whole of Section 145(C) of the NIRC, as amended,
becomes unavoidably inoperative should a declaration of unconstitutionality be decreed.

This result is in accordance with the ruling case law on the matter:

The general rule is that where part of a statute is void as repugnant to the Constitution, while
another part is valid, the valid portion, if separable from the invalid, may stand and be enforced.
The presence of a separability clause in a statute creates the presumption that the legislature
intended separability, rather than complete nullity of the statute. To justify this result, the valid
portion must be so far independent of the invalid portion that it is fair to presume that the
legislature would have enacted it by itself if it had supposed that it could not constitutionally enact
the other. Enough must remain to make a complete, intelligible and valid statute, which carries out
the legislative intent. x x x

The exception to the general rule is that when the parts of a statute are so mutually dependent and
connected, as conditions, considerations, inducements, or compensations for each other, as to
warrant a belief that the legislature intended them as a whole, the nullity of one part will vitiate the
rest. In making the parts of the statute dependent, conditional, or connected with one another, the
legislature intended the statute to be carried out as a whole and would not have enacted it if one
part is void, in which case if some parts are unconstitutional, all the other provisions thus
dependent, conditional, or connected must fall with them. (Agpalo, Statutory Construction, 1986
ed., pp. 28-29)

44 The practical effect of the operation of the classification freeze provision may be visualized as
a timeline starting with brands in Annex "D" which were classified based on their net retail prices
as of October 1, 1996. As new brands were introduced in the market, new classes of brands were
likewise created depending on the time they were introduced and the time their classifications
were finally fixed by the BIR pursuant to the relevant revenue regulations. The characterization of
petitioner that the classification freeze provision merely created two classes of brands, i.e., old
brands under Annex "D" and new brands introduced after the effectivity of R.A. 8240 is thus,
inaccurate.

In line with this observation, the succeeding discussions shall make use as point of comparison
older brands vis-à-vis newer brands and not old brands (under Annex "D") vis-à-vis new brands.
In concrete terms, the disparate tax treatment that appears to have taken place between brands in
Annex "D" classified in 1996 and petitioner’s new brands classified in 2003 may, under the same
conditions (i.e., piercing of the tax bracket by the older brand through increase of net retail price
over time), occur between an older brand classified in 2004 (assuming that it is not classified
under the highest tax bracket) and a newer brand that will be classified, say, in 2010.

45 215 Phil. 582 (1984).

46 Id. at 589-590.

47 Central Bank Employees Association, Inc. v. Bangko Sentral ng Pilipinas, G.R. No. 148208,
December 15, 2004, 446 SCRA 299, 370.

48 Nordlinger v. Hahn, 505 U.S. 1 (1992).

49 F.S. Royster Guano Co. v. Commonwealth of Virginia, 253 U.S. 412, 415 (1920).

50 See Basco v. Philippine Amusements and Gaming Corp., 274 Phil. 323, 334-335 (1991).

51 Madden v. Commonwealth of Kentucky, 309 U.S. 83, 88 (1940).

52 Government Service Insurance System v. Montesclaros, G.R. No. 146494, July 14, 2004, 434
SCRA 441, 451-452.

53 The application of the freezing mechanism to newer brands is reflected in the following
amendments introduced by R.A. No. 9334 to R.A. No. 8240, to wit:

Suggested net retail price shall mean the net retail price at which new brands, as defined above, of
locally manufactured or imported cigarettes are intended by the manufacturer or importer to be
sold on retail in major supermarkets or retail outlets in Metro Manila for those marketed
nationwide, and in other regions, for those with regional markets. At the end of three (3) months
from the product launch, the Bureau of Internal Revenue shall validate the suggested net retail
price of the new brand against the net retail price as defined herein and determine the correct tax
bracket under which a particular new brand of cigarette, as defined above, shall be classified. After
the end of eighteen (18) months from such validation, the Bureau of Internal Revenue shall
revalidate the initially validated net retail price against the net retail price as of the time of
revalidation in order to finally determine the correct tax bracket under which a particular new
brand of cigarettes shall be classified; Provided however, That brands of cigarettes introduced in
the domestic market between January 1, 1997 and December 31, 2003 shall remain in the
classification under which the Bureau of Internal Revenue has determined them to belong as of
December 31, 2003. Such classification of new brands and brands introduced between January 1,
1997 and December 31, 2003 shall not be revised except by an act of Congress.

xxxx

The classification of each brand of cigarettes based on its average net retail price as of October 1,
1996, as set forth in Annex "D", including the classification of brands for the same products
which, although not set forth in said Annex "D", were registered and were being commercially
produced and marketed on or after October 1, 1996, and which continue to be commercially
produced and marketed after the effectivity of this Act, shall remain in force until revised by
Congress. (Emphasis supplied)

54 II Record, Senate 10th Congress (October 15, 1996).

55 It may be noted that after six (6) years from the passage of R.A. No. 8240 or in 2003, several
bills were filed in Congress seeking to amend the classification freeze provision by shifting to a
periodic adjustment of tax rate and tax brackets as well as periodic resurvey and reclassification of
old and new brands to be conducted by the BIR. This was intended to address the perceived unfair
differential tax treatment between old and new brands that occurs over the lapse of time. Petitioner
views these bills as the remedy to solve the alleged unfair tax treatment arising from the
classification freeze provision (See petitioner’s petition before the trial court, records, vol. I, p. 21)
Interestingly, these bills filed in 2003 are substantially the same as the above discussed DOF
proposal which was rejected by Congress in enacting R.A. No. 8240 for reasons that will be
discussed in what follows.

56 Record, House 10th Congress (March 11, 1996).

57 Senator Enrile explained how this periodic adjustment and reclassification provision would
operate, thusly:

Since 1996 is the year during which we are adopting this law— and it will take effect January of
next year— the two-year period covered will be 1997 and 1998. So in order to find out the rate of
adjustment both of the cutoff point price (tax bracket), retail price and the corresponding specific
tax rate, we divide the CPI of 1998 by the CPI of 1996 and then we get a factor or a quotient
which is 1.1272. The figure "one(1)" before the decimal point represents the CPI of 1996 and the
numbers after the decimal point would represent the rate of increase.

So, in effect, what I am saying is, if we take 100% out of 1.1272 which is the quotient of dividing
257, the CPI of 1998 by 228, the CPI of 1996, then, we end up with .1272 or 12%, a little less than
13%.

If we multiply the net retail price now, which is the cut off point (of the tax brackets) established
by law as of the time we enact this law, by approximately 13%, that will be the cutoff point price,
and we increase the net retail price used as a base when we adopted this law by 13%. It increases
the corresponding specific tax by 13% and this will be the adjusted cutoff point and adjusted
specific tax as of 1999.

58 The discussion is in reference to the periodic adjustment and reclassification provision of beer.
However, under the Senate Version, the same periodic adjustment and reclassification provision is
applied to cigarettes so that the same reasoning is applicable to cigarettes.

59 II Record, Senate 10th Congress (November 4, 1996).

60 Id.

61 Id.

62 Id.

63 Id.

64 II Record, Senate 10th Congress (November 21, 1996).

65 Record, House 10th Congress (November 21, 1996).

66 Id.

67 Id.

68 To give a better perspective of the cigarette market based on volume, in 2003 alone, sales
volume was as follows: 2.1 billion packs under the low-priced segment, 898 million packs under
the medium-priced segment, 1.3 billion packs under the high-priced segment. [Record, Senate
13th Congress (November 17, 2004)]

69 Supra note 47.

70 AMJUR STATELOCL § 122 citing Chicago Freight Car Leasing Co. v. Limbach, 62 Ohio St.
3d 489, 584 N.E.2d 690 (1992); Sandy Springs Water Co. v. Department of Health and
Environmental Control, 324 S.C. 177, 478 S.E.2d 60 (1996). See also Skyscraper Corporation v.
County of Newberry, 323 S.C. 412, 475 S.E.2d 764 (1996).

71 II Record, Senate 10th Congress (October 15, 1996).

72 See Annex "A," Revenue Regulations No. 22-2003.

73 Supra note 40 at 588-589.


74 Valmonte v. Belmonte, Jr., G.R. No. 74930, February 13, 1989, 170 SCRA 256, 268.

75 Cf. Roschen v. Ward, 279 U.S. 337, 339 (1929).

76 It may be observed that tax legislation is not solely a revenue-generating measure as it also
functions as a regulatory tool, a policy instrument to affect consumer behavior (e.g., sumptuary
effect), etc..

77 440 U.S. 93 (1979).

78 Id. at 97.

79 Section 4(B) of Revenue Regulations No. 1-97 provides:

Section 4. Classification and Manner of Taxation of Existing Brands, New Brands and Variant of
Existing Brands.

xxx

B. New Brand

New brands shall be classified according to their current net retail price. In the meantime that the
current net retail price has not yet been established, the suggested net retail price shall be used to
determine the specific tax classification. Thereafter, a survey shall be conducted in 20 major
supermarkets or retail outlets in Metro Manila (for brands of cigarette marketed nationally) or in
five (5) major supermarkets or retail outlets in the region (for brands which are marketed only
outside Metro Manila) at which the cigarette is sold on retail in reams/carton, three (3) months
after the initial removal of the new brand to determine the actual net retail price excluding the
excise tax and value added tax which shall then be the basis in determining the specific tax
classification. In case the current net retail price is higher than the suggested net retail price, the
former shall prevail. Otherwise, the suggested net retail price shall prevail. Any difference in the
specific tax due shall be assessed and collected inclusive of increments as provided for by the
National Internal Revenue Code, as amended.

The survey contemplated herein to establish the current net retail price on locally manufactured
and imported cigarettes shall be conducted by the duly authorized representatives of the
Commissioner of Internal Revenue together with a representative of the Regional Director from
each Regional Office having jurisdiction over the retail outlet within the Region being surveyed,
and who shall submit, without delay, their consolidated written report to the Commissioner of
Internal Revenue.

80 Record, Senate 13th Congress (December 6, 2004).

81 Section 21. No treaty or international agreement shall be valid and effective unless concurred
in by at least two-thirds of all the Members of the Senate.

82 The Philippine Senate ratified the GATT on December 14, 1994. See Merlin M. Magallona,
Fundamentals of Public International Law, 2005 ed., pp. 545-546.

83 G.R. No. 89651, November 10, 1989, 179 SCRA 287, 294 cited in Magallona, supra at 552.

The Lawphil Project - Arellano Law Foundation


EN BANC

HON. EXECUTIVE SECRETARY, G.R. No. 164171


HON. SECRETARY OF THE
DEPARTMENT OF TRANSPORTATION
AND COMMUNICATIONS (DOTC),
COMMISSIONER OF CUSTOMS,
ASSISTANT SECRETARY, LAND
TRANSPORTATION OFFICE (LTO),
COLLECTOR OF CUSTOMS, SUBIC
BAY FREE PORT ZONE, AND CHIEF
OF LTO, SUBIC BAY FREE PORT ZONE,
Petitioners,
Present:

Panganiban, C.J.,
Puno,
Quisumbing,
Ynares-Santiago,
Sandoval-Gutierrez,
- versus - Carpio,
Austria-Martinez,
Corona,
Carpio-Morales,
Callejo, Sr.,
Azcuna,
Tinga,
Chico-Nazario, and
Garcia, JJ.
SOUTHWING HEAVY INDUSTRIES,
INC., represented by its President JOSE
T. DIZON, UNITED AUCTIONEERS,
INC., represented by its President
DOMINIC SYTIN, and MICROVAN,
INC., represented by its President
MARIANO C. SONON,
Respondents.

x -------------------------------------------------------- x

HON. EXECUTIVE SECRETARY, G.R. No. 164172


SECRETARY OF THE DEPARTMENT
OF TRANSPORTATION AND
COMMUNICATION (DOTC),
COMMISSIONER OF CUSTOMS,
ASSISTANT SECRETARY, LAND
TRANSPORTATION OFFICE (LTO),
COLLECTOR OF CUSTOMS, SUBIC
BAY FREE PORT ZONE AND CHIEF OF
LTO, SUBIC BAY FREE PORT ZONE,
Petitioners,

- versus -

SUBIC INTEGRATED MACRO


VENTURES CORP., represented
by its President YOLANDA AMBAR,
Respondent.

x -------------------------------------------------------- x

HON. EXECUTIVE SECRETARY, G.R. No. 168741


HON. SECRETARY OF FINANCE,
THE CHIEF OF THE LAND
TRANSPORTATION OFFICE, THE
COMMISSIONER OF CUSTOMS,
and THE COLLECTOR OF CUSTOMS,
SUBIC SPECIAL ECONOMIC ZONE,
Petitioners,

- versus -

MOTOR VEHICLE IMPORTERS


ASSOCIATION OF SUBIC BAY
FREEPORT, INC., represented by Promulgated:
its President ALFREDO S. GALANG,
Respondent. February 20, 2006

x ---------------------------------------------------------------------------------------- x

DECISION

YNARES-SANTIAGO, J.:

The instant consolidated petitions seek to annul and set aside the Decisions of the Regional Trial
Court of Olongapo City, Branch 72, in Civil Case No. 20-0-04 and Civil Case No. 22-0-04, both
dated May 24, 2004; and the February 14, 2005 Decision of the Court of Appeals in CA-G.R. SP.
No. 83284, which declared Article 2, Section 3.1 of Executive Order No. 156 (EO 156)
unconstitutional. Said executive issuance prohibits the importation into the country, inclusive of
the Special Economic and Freeport Zone or the Subic Bay Freeport (SBF or Freeport), of used
motor vehicles, subject to a few exceptions.

The undisputed facts show that on December 12, 2002, President Gloria Macapagal-Arroyo,
through Executive Secretary Alberto G. Romulo, issued EO 156, entitled PROVIDING FOR A
COMPREHENSIVE INDUSTRIAL POLICY AND DIRECTIONS FOR THE MOTOR
VEHICLE DEVELOPMENT PROGRAM AND ITS IMPLEMENTING GUIDELINES. The
challenged provision states:

3.1 The importation into the country, inclusive of the Freeport, of all types of used motor vehicles
is prohibited, except for the following:

3.1.1 A vehicle that is owned and for the personal use of a returning resident or immigrant and
covered by an authority to import issued under the No-dollar Importation Program. Such vehicles
cannot be resold for at least three (3) years;

3.1.2 A vehicle for the use of an official of the Diplomatic Corps and authorized to be imported by
the Department of Foreign Affairs;

3.1.3 Trucks excluding pickup trucks;


1. with GVW of 2.5-6.0 tons covered by an authority to import issued by the DTI.
2. With GVW above 6.0 tons.

3.1.4 Buses:
1. with GVW of 6-12 tons covered by an authority to import issued by DTI;
2. with GVW above 12 tons.

3.1.5 Special purpose vehicles:


1. fire trucks
2. ambulances
3. funeral hearse/coaches
4. crane lorries
5. tractor heads and truck tractors
6. boom trucks
7. tanker trucks
8. tank lorries with high pressure spray gun
9. reefers or refrigerated trucks
10. mobile drilling derricks
11. transit/concrete mixers
12. mobile radiological units
13. wreckers or tow trucks
14. concrete pump trucks
15. aerial/bucket flat-form trucks
16. street sweepers
17. vacuum trucks
18. garbage compactors
19. self loader trucks
20. man lift trucks
21. lighting trucks
22. trucks mounted with special purpose equipment
23. all other types of vehicle designed for a specific use.

The issuance of EO 156 spawned three separate actions for declaratory relief before Branch 72 of
the Regional Trial Court of Olongapo City, all seeking the declaration of the unconstitutionality of
Article 2, Section 3.1 of said executive order. The cases were filed by herein respondent entities,
who or whose members, are classified as Subic Bay Freeport Enterprises and engaged in the
business of, among others, importing and/or trading used motor vehicles.
G.R. No. 164171:

On January 16, 2004, respondents Southwing Heavy Industries, Inc., (SOUTHWING) United
Auctioneers, Inc. (UNITED AUCTIONEERS), and Microvan, Inc. (MICROVAN), instituted a
declaratory relief case docketed as Civil Case No. 20-0-04,[1] against the Executive Secretary,
Secretary of Transportation and Communication, Commissioner of Customs, Assistant Secretary
and Head of the Land Transportation Office, Subic Bay Metropolitan Authority (SBMA),
Collector of Customs for the Port at Subic Bay Freeport Zone, and the Chief of the Land
Transportation Office at Subic Bay Freeport Zone.
SOUTHWING, UNITED AUCTIONEERS and MICROVAN prayed that judgment be rendered
(1) declaring Article 2, Section 3.1 of EO 156 unconstitutional and illegal; (2) directing the
Secretary of Finance, Commissioner of Customs, Collector of Customs and the Chairman of the
SBMA to allow the importation of used motor vehicles; (2) ordering the Land Transportation
Office and its subordinates inside the Subic Special Economic Zone to process the registration of
the imported used motor vehicles; and (3) in general, to allow the unimpeded entry and
importation of used motor vehicles subject only to the payment of the required customs duties.

Upon filing of petitioners answer/comment, respondents SOUTHWING and MICROVAN filed a


motion for summary judgment which was granted by the trial court. On May 24, 2004, a summary
judgment was rendered declaring that Article 2, Section 3.1 of EO 156 constitutes an unlawful
usurpation of legislative power vested by the Constitution with Congress. The trial court further
held that the proviso is contrary to the mandate of Republic Act No. 7227 (RA 7227) or the Bases
Conversion and Development Act of 1992 which allows the free flow of goods and capital within
the Freeport. The dispositive portion of the said decision reads:

WHEREFORE, judgment is hereby rendered in favor of petitioner declaring Executive Order 156
[Article 2, Section] 3.1 for being unconstitutional and illegal; directing respondents Collector of
Customs based at SBMA to allow the importation and entry of used motor vehicles pursuant to the
mandate of RA 7227; directing respondent Chief of the Land Transportation Office and its
subordinates inside the Subic Special Economic Zone or SBMA to process the registration of
imported used motor vehicle; and in general, to allow unimpeded entry and importation of used
motor vehicles to the Philippines subject only to the payment of the required customs duties.

SO ORDERED.[2]

From the foregoing decision, petitioners sought relief before this Court via a petition for review on
certiorari, docketed as G.R. No. 164171.

G.R. No. 164172:

On January 20, 2004, respondent Subic Integrated Macro Ventures Corporation (MACRO
VENTURES) filed with the same trial court, a similar action for declaratory relief docketed as
Civil Case No. 22-0-04,[3] with the same prayer and against the same parties[4] as those in Civil
Case No. 20-0-04.
In this case, the trial court likewise rendered a summary judgment on May 24, 2004, holding that
Article 2, Section 3.1 of EO 156, is repugnant to the constitution.[5] Elevated to this Court via a
petition for review on certiorari, Civil Case No. 22-0-04 was docketed as G.R. No. 164172.

G.R. No. 168741

On January 22, 2003, respondent Motor Vehicle Importers Association of Subic Bay Freeport, Inc.
(ASSOCIATION), filed another action for declaratory relief with essentially the same prayer as
those in Civil Case No. 22-0-04 and Civil Case No. 20-0-04, against the Executive Secretary,
Secretary of Finance, Chief of the Land Transportation Office, Commissioner of Customs,
Collector of Customs at SBMA and the Chairman of SBMA. This was docketed as Civil Case No.
30-0-2003,[6] before the same trial court.

In a decision dated March 10, 2004, the court a quo granted the ASSOCIATIONs prayer and
declared the assailed proviso as contrary to the Constitution, to wit:

WHEREFORE, judgment is hereby rendered in favor of petitioner declaring Executive Order 156
[Article 2, Section] 3.1 for being unconstitutional and illegal; directing respondents Collector of
Customs based at SBMA to allow the importation and entry of used motor vehicles pursuant to the
mandate of RA 7227; directing respondent Chief of the Land Transportation Office and its
subordinates inside the Subic Special Economic Zone or SBMA to process the registration of
imported used motor vehicles; directing the respondent Chairman of the SBMA to allow the entry
into the Subic Special Economic Zone or SBMA imported used motor vehicle; and in general, to
allow unimpeded entry and importation of used motor vehicles to the Philippines subject only to
the payment of the required customs duties.

SO ORDERED.[7]

Aggrieved, the petitioners in Civil Case No. 30-0-2003, filed a petition for certiorari[8] with the
Court of Appeals (CA-G.R. SP. No. 83284) which denied the petition on February 14, 2005 and
sustained the finding of the trial court that Article 2, Section 3.1 of EO 156, is void for being
repugnant to the constitution. The dispositive portion thereof, reads:

WHEREFORE, the instant petition for certiorari is hereby DENIED. The assailed decision of the
Regional Trial Court, Third Judicial Region, Branch 72, Olongapo City, in Civil Case No. 30-0-
2003, accordingly, STANDS.

SO ORDERED.[9]

The aforequoted decision of the Court of Appeals was elevated to this Court and docketed as G.R.
No. 168741. In a Resolution dated October 4, 2005,[10] said case was consolidated with G.R. No.
164171 and G.R. No. 164172.
Petitioners are now before this Court contending that Article 2, Section 3.1 of EO 156 is valid and
applicable to the entire country, including the Freeeport. In support of their arguments, they raise
procedural and substantive issues bearing on the constitutionality of the assailed proviso. The
procedural issues are: the lack of respondents locus standi to question the validity of EO 156, the
propriety of challenging EO 156 in a declaratory relief proceeding and the applicability of a
judgment on the pleadings in this case.

Petitioners argue that respondents will not be affected by the importation ban considering that
their certificate of registration and tax exemption do not authorize them to engage in the
importation and/or trading of used cars. They also aver that the actions filed by respondents do not
qualify as declaratory relief cases. Section 1, Rule 63 of the Rules of Court provides that a petition
for declaratory relief may be filed before there is a breach or violation of rights. Petitioners claim
that there was already a breach of respondents supposed right because the cases were filed more
than a year after the issuance of EO 156. In fact, in Civil Case No. 30-0-2003, numerous warrants
of seizure and detention were issued against imported used motor vehicles belonging to
respondent ASSOCIATIONs members.

Petitioners arguments lack merit.

The established rule that the constitutionality of a law or administrative issuance can be
challenged by one who will sustain a direct injury as a result of its enforcement[11] has been
satisfied in the instant case. The broad subject of the prohibited importation is all types of used
motor vehicles. Respondents would definitely suffer a direct injury from the implementation of
EO 156 because their certificate of registration and tax exemption authorize them to trade and/or
import new and used motor vehicles and spare parts, except used cars.[12] Other types of motor
vehicles imported and/or traded by respondents and not falling within the category of used cars
would thus be subjected to the ban to the prejudice of their business. Undoubtedly, respondents
have the legal standing to assail the validity of EO 156.

As to the propriety of declaratory relief as a vehicle for assailing the executive issuance, suffice it
to state that any breach of the rights of respondents will not affect the case. In Commission on
Audit of the Province of Cebu v. Province of Cebu,[13] the Court entertained a suit for declaratory
relief to finally settle the doubt as to the proper interpretation of the conflicting laws involved,
notwithstanding a violation of the right of the party affected. We find no reason to deviate from
said ruling mindful of the significance of the present case to the national economy.

So also, summary judgments were properly rendered by the trial court because the issues involved
in the instant case were pure questions of law. A motion for summary judgment is premised on the
assumption that the issues presented need not be tried either because these are patently devoid of
substance or that there is no genuine issue as to any pertinent fact. It is a method sanctioned by the
Rules of Court for the prompt disposition of a civil action in which the pleadings raise only a legal
issue, not a genuine issue as to any material fact.[14]

At any rate, even assuming the procedural flaws raised by petitioners truly exist, the Court is not
precluded from brushing aside these technicalities and taking cognizance of the action filed by
respondents considering its importance to the public and in keeping with the duty to determine
whether the other branches of the government have kept themselves within the limits of the
Constitution.[15]

We now come to the substantive issues, which are: (1) whether there is statutory basis for the
issuance of EO 156; and (2) if the answer is in the affirmative, whether the application of Article
2, Section 3.1 of EO 156, reasonable and within the scope provided by law.

The main thrust of the petition is that EO 156 is constitutional because it was issued pursuant to
EO 226, the Omnibus Investment Code of the Philippines and that its application should be
extended to the Freeport because the guarantee of RA 7227 on the free flow of goods into the said
zone is merely an exemption from customs duties and taxes on items brought into the Freeport and
not an open floodgate for all kinds of goods and materials without restriction.

In G.R. No. 168741, the Court of Appeals invalidated Article 2, Section 3.1 of EO 156, on the
ground of lack of any statutory basis for the President to issue the same. It held that the prohibition
on the importation of used motor vehicles is an exercise of police power vested on the legislature
and absent any enabling law, the exercise thereof by the President through an executive issuance,
is void.

Police power is inherent in a government to enact laws, within constitutional limits, to promote the
order, safety, health, morals, and general welfare of society. It is lodged primarily with the
legislature. By virtue of a valid delegation of legislative power, it may also be exercised by the
President and administrative boards, as well as the lawmaking bodies on all municipal levels,
including the barangay.[16] Such delegation confers upon the President quasi-legislative power
which may be defined as the authority delegated by the law-making body to the administrative
body to adopt rules and regulations intended to carry out the provisions of the law and implement
legislative policy.[17] To be valid, an administrative issuance, such as an executive order, must
comply with the following requisites:

(1) Its promulgation must be authorized by the legislature;


(2) It must be promulgated in accordance with the prescribed procedure;
(3) It must be within the scope of the authority given by the legislature; and
(4) It must be reasonable.[18]

Contrary to the conclusion of the Court of Appeals, EO 156 actually satisfied the first requisite of
a valid administrative order. It has both constitutional and statutory bases.

Delegation of legislative powers to the President is permitted in Section 28(2) of Article VI of the
Constitution. It provides:

(2) The Congress may, by law, authorize the President to fix within specified limits, and subject to
such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage
and wharfage dues, and other duties or imposts within the framework of the national development
program of the Government.[19] (Emphasis supplied)

The relevant statutes to execute this provision are:

1) The Tariff and Customs Code which authorizes the President, in the interest of national
economy, general welfare and/or national security, to, inter alia, prohibit the importation of any
commodity. Section 401 thereof, reads:

Sec. 401. Flexible Clause.

a. In the interest of national economy, general welfare and/or national security, and subject to the
limitations herein prescribed, the President, upon recommendation of the National Economic and
Development Authority (hereinafter referred to as NEDA), is hereby empowered: x x x (2) to
establish import quota or to ban imports of any commodity, as may be necessary; x x x Provided,
That upon periodic investigations by the Tariff Commission and recommendation of the NEDA,
the President may cause a gradual reduction of protection levels granted in Section One hundred
and four of this Code, including those subsequently granted pursuant to this section. (Emphasis
supplied)

2) Executive Order No. 226, the Omnibus Investment Code of the Philippines which was issued
on July 16, 1987, by then President Corazon C. Aquino, in the exercise of legislative power under
the Provisional Freedom Constitution,[20] empowers the President to approve or reject the
prohibition on the importation of any equipment or raw materials or finished products. Pertinent
provisions thereof, read:

ART. 4. Composition of the board. The Board of Investments shall be composed of seven (7)
governors: The Secretary of Trade and Industry, three (3) Undersecretaries of Trade and Industry
to be chosen by the President; and three (3) representatives from the government agencies and the
private sector x x x.

ART. 7. Powers and duties of the Board.

xxxx

(12) Formulate and implement rationalization programs for certain industries whose operation
may result in dislocation, overcrowding or inefficient use of resources, thus impeding economic
growth. For this purpose, the Board may formulate guidelines for progressive manufacturing
programs, local content programs, mandatory sourcing requirements and dispersal of industries. In
appropriate cases and upon approval of the President, the Board may restrict, either totally or
partially, the importation of any equipment or raw materials or finished products involved in the
rationalization program; (Emphasis supplied)
3) Republic Act No. 8800, otherwise known as the Safeguard Measures Act (SMA), and entitled
An Act Protecting Local Industries By Providing Safeguard Measures To Be Undertaken In
Response To Increased Imports And Providing Penalties For Violation Thereof,[21] designated the
Secretaries[22] of the Department of Trade and Industry (DTI) and the Department of Agriculture,
in their capacity as alter egos of the President, as the implementing authorities of the safeguard
measures, which include, inter alia, modification or imposition of any quantitative restriction on
the importation of a product into the Philippines. The purpose of the SMA is stated in the
declaration of policy, thus:

SEC. 2. Declaration of Policy. The State shall promote competitiveness of domestic industries and
producers based on sound industrial and agricultural development policies, and efficient use of
human, natural and technical resources. In pursuit of this goal and in the public interest, the State
shall provide safeguard measures to protect domestic industries and producers from increased
imports which cause or threaten to cause serious injury to those domestic industries and producers.

There are thus explicit constitutional and statutory permission authorizing the President to ban or
regulate importation of articles and commodities into the country.

Anent the second requisite, that is, that the order must be issued or promulgated in accordance
with the prescribed procedure, it is necessary that the nature of the administrative issuance is
properly determined. As in the enactment of laws, the general rule is that, the promulgation of
administrative issuances requires previous notice and hearing, the only exception being where the
legislature itself requires it and mandates that the regulation shall be based on certain facts as
determined at an appropriate investigation.[23] This exception pertains to the issuance of
legislative rules as distinguished from interpretative rules which give no real consequence more
than what the law itself has already prescribed;[24] and are designed merely to provide guidelines
to the law which the administrative agency is in charge of enforcing.[25] A legislative rule, on the
other hand, is in the nature of subordinate legislation, crafted to implement a primary legislation.

In Commissioner of Internal Revenue v. Court of Appeals,[26] and Commissioner of Internal


Revenue v. Michel J. Lhuillier Pawnshop, Inc.,[27] the Court enunciated the doctrine that when an
administrative rule goes beyond merely providing for the means that can facilitate or render less
cumbersome the implementation of the law and substantially increases the burden of those
governed, it behooves the agency to accord at least to those directly affected a chance to be heard
and, thereafter, to be duly informed, before the issuance is given the force and effect of law.

In the instant case, EO 156 is obviously a legislative rule as it seeks to implement or execute
primary legislative enactments intended to protect the domestic industry by imposing a ban on the
importation of a specified product not previously subject to such prohibition. The due process
requirements in the issuance thereof are embodied in Section 401[28] of the Tariff and Customs
Code and Sections 5 and 9 of the SMA[29] which essentially mandate the conduct of investigation
and public hearings before the regulatory measure or importation ban may be issued.

In the present case, respondents neither questioned before this Court nor with the courts below the
procedure that paved the way for the issuance of EO 156. What they challenged in their petitions
before the trial court was the absence of substantive due process in the issuance of the EO.[30]
Their main contention before the court a quo is that the importation ban is illogical and unfair
because it unreasonably drives them out of business to the prejudice of the national economy.
Considering the settled principle that in the absence of strong evidence to the contrary, acts of the
other branches of the government are presumed to be valid,[31] and there being no objection from
the respondents as to the procedure in the promulgation of EO 156, the presumption is that said
executive issuance duly complied with the procedures and limitations imposed by law.

To determine whether EO 156 has complied with the third and fourth requisites of a valid
administrative issuance, to wit, that it was issued within the scope of authority given by the
legislature and that it is reasonable, an examination of the nature of a Freeport under RA 7227 and
the primordial purpose of the importation ban under the questioned EO is necessary.

RA 7227 was enacted providing for, among other things, the sound and balanced conversion of the
Clark and Subic military reservations and their extensions into alternative productive uses in the
form of Special Economic and Freeport Zone, or the Subic Bay Freeport, in order to promote the
economic and social development of Central Luzon in particular and the country in general.

The Rules and Regulations Implementing RA 7227 specifically defines the territory comprising
the Subic Bay Freeport, referred to as the Special Economic and Freeport Zone in Section 12 of
RA 7227 as "a separate customs territory consisting of the City of Olongapo and the Municipality
of Subic, Province of Zambales, the lands occupied by the Subic Naval Base and its contiguous
extensions as embraced, covered and defined by the 1947 Philippine-U.S. Military Base
Agreement as amended and within the territorial jurisdiction of Morong and Hermosa, Province of
Bataan, the metes and bounds of which shall be delineated by the President of the Philippines;
provided further that pending establishment of secure perimeters around the entire SBF, the SBF
shall refer to the area demarcated by the SBMA pursuant to Section 13[32] hereof."

Among the salient provisions of RA 7227 are as follows:

SECTION 12. Subic Special Economic Zone.

xxxx

The abovementioned zone shall be subject to the following policies:

xxxx

(a) Within the framework and subject to the mandate and limitations of the Constitution and the
pertinent provisions of the Local Government Code, the Subic Special Economic Zone shall be
developed into a self-sustaining, industrial, commercial, financial and investment center to
generate employment opportunities in and around the zone and to attract and promote productive
foreign investments;
(b) The Subic Special Economic Zone shall be operated and managed as a separate customs
territory ensuring free flow or movement of goods and capital within, into and exported out of the
Subic Special Economic Zone, as well as provide incentives such as tax and duty-free
importations of raw materials, capital and equipment. However, exportation or removal of goods
from the territory of the Subic Special Economic Zone to the other parts of the Philippine territory
shall be subject to customs duties and taxes under the Customs and Tariff Code and other relevant
tax laws of the Philippines;

The Freeport was designed to ensure free flow or movement of goods and capital within a portion
of the Philippine territory in order to attract investors to invest their capital in a business climate
with the least governmental intervention. The concept of this zone was explained by Senator
Guingona in this wise:

Senator Guingona. Mr. President, the special economic zone is successful in many places,
particularly Hong Kong, which is a free port. The difference between a special economic zone and
an industrial estate is simply expansive in the sense that the commercial activities, including the
establishment of banks, services, financial institutions, agro-industrial activities, maybe
agriculture to a certain extent.

This delineates the activities that would have the least of government intervention, and the running
of the affairs of the special economic zone would be run principally by the investors themselves,
similar to a housing subdivision, where the subdivision owners elect their representatives to run
the affairs of the subdivision, to set the policies, to set the guidelines.

We would like to see Subic area converted into a little Hong Kong, Mr. President, where there is a
hub of free port and free entry, free duties and activities to a maximum spur generation of
investment and jobs.

While the investor is reluctant to come in the Philippines, as a rule, because of red tape and
perceived delays, we envision this special economic zone to be an area where there will be
minimum government interference.

The initial outlay may not only come from the Government or the Authority as envisioned here,
but from them themselves, because they would be encouraged to invest not only for the land but
also for the buildings and factories. As long as they are convinced that in such an area they can do
business and reap reasonable profits, then many from other parts, both local and foreign, would
invest, Mr. President.[33] (Emphasis, added)

With minimum interference from the government, investors can, in general, engage in any kind of
business as well as import and export any article into and out of the Freeport. These are among the
rights accorded to Subic Bay Freeport Enterprises under Section 39 of the Rules and Regulations
Implementing RA 7227, thus
SEC. 39. Rights and Obligations.- SBF Enterprises shall have the following rights and obligations:

a. To freely engage in any business, trade, manufacturing, financial or service activity, and to
import and export freely all types of goods into and out of the SBF, subject to the provisions of the
Act, these Rules and other regulations that may be promulgated by the SBMA;

Citing, inter alia, the interpellations of Senator Enrile, petitioners claim that the free flow or
movement of goods and capital only means that goods and material brought within the Freeport
shall not be subject to customs duties and other taxes and should not be construed as an open
floodgate for entry of all kinds of goods. They thus surmise that the importation ban on motor
vehicles is applicable within the Freeport. Pertinent interpellations of Senator Enrile on the
concept of Freeport is as follows:

Senator Enrile: Mr. President, I think we are talking here of sovereign concepts, not territorial
concepts. The concept that we are supposed to craft here is to carve out a portion of our terrestrial
domain as well as our adjacent waters and say to the world: Well, you can set up your factories in
this area that we are circumscribing, and bringing your equipment and bringing your goods, you
are not subject to any taxes and duties because you are not within the customs jurisdiction of the
Republic of the Philippines, whether you store the goods or only for purposes of transshipment or
whether you make them into finished products again to be reexported to other lands.

xxxx

My understanding of a free port is, we are in effect carving out a part of our territory and make it
as if it were foreign territory for purposes of our customs laws, and that people can come, bring
their goods, store them there and bring them out again, as long as they do not come into the
domestic commerce of the Republic.

We do not really care whether these goods are stored here. The only thing that we care is for our
people to have an employment because of the entry of these goods that are being discharged,
warehoused and reloaded into the ships so that they can be exported. That will generate
employment for us. For as long as that is done, we are saying, in effect, that we have the least
contact with our tariff and customs laws and our tax laws. Therefore, we consider these goods as
outside of the customs jurisdiction of the Republic of the Philippines as yet, until we draw them
from this territory and bring them inside our domestic commerce. In which case, they have to pass
through our customs gate. I thought we are carving out this entire area and convert it into this kind
of concept.[34]

However, contrary to the claim of petitioners, there is nothing in the foregoing excerpts which
absolutely limits the incentive to Freeport investors only to exemption from customs duties and
taxes. Mindful of the legislative intent to attract investors, enhance investment and boost the
economy, the legislature could not have limited the enticement only to exemption from taxes. The
minimum interference policy of the government on the Freeport extends to the kind of business
that investors may embark on and the articles which they may import or export into and out of the
zone. A contrary interpretation would defeat the very purpose of the Freeport and drive away
investors.

It does not mean, however, that the right of Freeport enterprises to import all types of goods and
article is absolute. Such right is of course subject to the limitation that articles absolutely
prohibited by law cannot be imported into the Freeport.[35] Nevertheless, in determining whether
the prohibition would apply to the Freeport, resort to the purpose of the prohibition is necessary.

In issuing EO 156, particularly the prohibition on importation under Article 2, Section 3.1, the
President envisioned to rationalize the importation of used motor vehicles and to enhance the
capabilities of the Philippine motor manufacturing firms to be globally competitive producers of
completely build-up units and their parts and components for the local and export markets.[36] In
justifying the issuance of EO 156, petitioners alleged that there has been a decline in the sales of
new vehicles and a remarkable growth of the sales of imported used motor vehicles. To address
the same, the President issued the questioned EO to prevent further erosion of the already
depressed market base of the local motor vehicle industry and to curtail the harmful effects of the
increase in the importation of used motor vehicles.[37]

Taking our bearings from the foregoing discussions, we hold that the importation ban runs afoul
the third requisite for a valid administrative order. To be valid, an administrative issuance must not
be ultra vires or beyond the limits of the authority conferred. It must not supplant or modify the
Constitution, its enabling statute and other existing laws, for such is the sole function of the
legislature which the other branches of the government cannot usurp. As held in United BF
Homeowners Association v. BF Homes, Inc.:[38]

The rule-making power of a public administrative body is a delegated legislative power, which it
may not use either to abridge the authority given it by Congress or the Constitution or to enlarge
its power beyond the scope intended. Constitutional and statutory provisions control what rules
and regulations may be promulgated by such a body, as well as with respect to what fields are
subject to regulation by it. It may not make rules and regulations which are inconsistent with the
provisions of the Constitution or a statute, particularly the statute it is administering or which
created it, or which are in derogation of, or defeat, the purpose of a statute.

In the instant case, the subject matter of the laws authorizing the President to regulate or forbid
importation of used motor vehicles, is the domestic industry. EO 156, however, exceeded the
scope of its application by extending the prohibition on the importation of used cars to the
Freeport, which RA 7227, considers to some extent, a foreign territory. The domestic industry
which the EO seeks to protect is actually the customs territory which is defined under the Rules
and Regulations Implementing RA 7227, as follows:

the portion of the Philippines outside the Subic Bay Freeport where the Tariff and Customs Code
of the Philippines and other national tariff and customs laws are in force and effect.[39]
The proscription in the importation of used motor vehicles should be operative only outside the
Freeport and the inclusion of said zone within the ambit of the prohibition is an invalid
modification of RA 7227. Indeed, when the application of an administrative issuance modifies
existing laws or exceeds the intended scope, as in the instant case, the issuance becomes void, not
only for being ultra vires, but also for being unreasonable.

This brings us to the fourth requisite. It is an axiom in administrative law that administrative
authorities should not act arbitrarily and capriciously in the issuance of rules and regulations. To
be valid, such rules and regulations must be reasonable and fairly adapted to secure the end in
view. If shown to bear no reasonable relation to the purposes for which they were authorized to be
issued, then they must be held to be invalid.[40]

There is no doubt that the issuance of the ban to protect the domestic industry is a reasonable
exercise of police power. The deterioration of the local motor manufacturing firms due to the
influx of imported used motor vehicles is an urgent national concern that needs to be swiftly
addressed by the President. In the exercise of delegated police power, the executive can therefore
validly proscribe the importation of these vehicles. Thus, in Taxicab Operators of Metro Manila,
Inc. v. Board of Transportation,[41] the Court held that a regulation phasing out taxi cabs more
than six years old is a valid exercise of police power. The regulation was sustained as reasonable
holding that the purpose thereof was to promote the convenience and comfort and protect the
safety of the passengers.

The problem, however, lies with respect to the application of the importation ban to the Freeport.
The Court finds no logic in the all encompassing application of the assailed provision to the
Freeport which is outside the customs territory. As long as the used motor vehicles do not enter the
customs territory, the injury or harm sought to be prevented or remedied will not arise. The
application of the law should be consistent with the purpose of and reason for the law. Ratione
cessat lex, et cessat lex. When the reason for the law ceases, the law ceases. It is not the letter
alone but the spirit of the law also that gives it life.[42] To apply the proscription to the Freeport
would not serve the purpose of the EO. Instead of improving the general economy of the country,
the application of the importation ban in the Freeport would subvert the avowed purpose of RA
7227 which is to create a market that would draw investors and ultimately boost the national
economy.

In similar cases, we also declared void the administrative issuance or ordinances concerned for
being unreasonable. To illustrate, in De la Cruz v. Paras,[43] the Court held as unreasonable and
unconstitutional an ordinance characterized by overbreadth. In that case, the Municipality of
Bocaue, Bulacan, prohibited the operation of all night clubs, cabarets and dance halls within its
jurisdiction for the protection of public morals. As explained by the Court:

x x x It cannot be said that such a sweeping exercise of a lawmaking power by Bocaue could
qualify under the term reasonable. The objective of fostering public morals, a worthy and
desirable end can be attained by a measure that does not encompass too wide a field. Certainly the
ordinance on its face is characterized by overbreadth. The purpose sought to be achieved could
have been attained by reasonable restrictions rather than by an absolute prohibition. The
admonition in Salaveria should be heeded: The Judiciary should not lightly set aside legislative
action when there is not a clear invasion of personal or property rights under the guise of police
regulation. It is clear that in the guise of a police regulation, there was in this instance a clear
invasion of personal or property rights, personal in the case of those individuals desirous of
patronizing those night clubs and property in terms of the investments made and salaries to be
earned by those therein employed.

Lupangco v. Court of Appeals,[44] is a case involving a resolution issued by the Professional


Regulation Commission which prohibited examinees from attending review classes and receiving
handout materials, tips, and the like three days before the date of examination in order to preserve
the integrity and purity of the licensure examinations in accountancy. Besides being unreasonable
on its face and violative of academic freedom, the measure was found to be more sweeping than
what was necessary, viz:
Needless to say, the enforcement of Resolution No. 105 is not a guarantee that the alleged
leakages in the licensure examinations will be eradicated or at least minimized. Making the
examinees suffer by depriving them of legitimate means of review or preparation on those last
three precious days when they should be refreshing themselves with all that they have learned in
the review classes and preparing their mental and psychological make-up for the examination day
itself would be like uprooting the tree to get rid of a rotten branch. What is needed to be done by
the respondent is to find out the source of such leakages and stop it right there. If corrupt officials
or personnel should be terminated from their loss, then so be it. Fixers or swindlers should be
flushed out. Strict guidelines to be observed by examiners should be set up and if violations are
committed, then licenses should be suspended or revoked. x x x

In Lucena Grand Central Terminal, Inc. v. JAC Liner, Inc.,[45] the Court likewise struck down as
unreasonable and overbreadth a city ordinance granting an exclusive franchise for 25 years,
renewable for another 25 years, to one entity for the construction and operation of one common
bus and jeepney terminal facility in Lucena City. While professedly aimed towards alleviating the
traffic congestion alleged to have been caused by the existence of various bus and jeepney
terminals within the city, the ordinance was held to be beyond what is reasonably necessary to
solve the traffic problem in the city.

By parity of reasoning, the importation ban in this case should also be declared void for its too
sweeping and unnecessary application to the Freeport which has no bearing on the objective of the
prohibition. If the aim of the EO is to prevent the entry of used motor vehicles from the Freeport
to the customs territory, the solution is not to forbid entry of these vehicles into the Freeport, but to
intensify governmental campaign and measures to thwart illegal ingress of used motor vehicles
into the customs territory.

At this juncture, it must be mentioned that on June 19, 1993, President Fidel V. Ramos issued
Executive Order No. 97-A, Further Clarifying The Tax And Duty-Free Privilege Within The Subic
Special Economic And Free Port Zone, Section 1 of which provides:
SECTION 1. The following guidelines shall govern the tax and duty-free privilege within the
Secured Area of the Subic Special Economic and Free Port Zone:

1.1. The Secured Area consisting of the presently fenced-in former Subic Naval Base shall be the
only completely tax and duty-free area in the SSEFPZ. Business enterprises and individuals
(Filipinos and foreigners) residing within the Secured Area are free to import raw materials,
capital goods, equipment, and consumer items tax and dutry-free. Consumption items, however,
must be consumed within the Secured Area. Removal of raw materials, capital goods, equipment
and consumer items out of the Secured Area for sale to non-SSEFPZ registered enterprises shall
be subject to the usual taxes and duties, except as may be provided herein.

In Tiu v. Court of Appeals[46] as reiterated in Coconut Oil Refiners Association, Inc. v. Torres,
[47] this provision limiting the special privileges on tax and duty-free importation in the presently
fenced-in former Subic Naval Base has been declared valid and constitutional and in accordance
with RA 7227. Consistent with these rulings and for easier management and monitoring of
activities and to prevent fraudulent importation of merchandise and smuggling, the free flow and
importation of used motor vehicles shall be operative only within the secured area.

In sum, the Court finds that Article 2, Section 3.1 of EO 156 is void insofar as it is made
applicable to the presently secured fenced-in former Subic Naval Base area as stated in Section 1.1
of EO 97-A. Pursuant to the separability clause[48] of EO 156, Section 3.1 is declared valid
insofar as it applies to the customs territory or the Philippine territory outside the presently
secured fenced-in former Subic Naval Base area as stated in Section 1.1 of EO 97-A. Hence, used
motor vehicles that come into the Philippine territory via the secured fenced-in former Subic
Naval Base area may be stored, used or traded therein, or exported out of the Philippine territory,
but they cannot be imported into the Philippine territory outside of the secured fenced-in former
Subic Naval Base area.

WHEREFORE, the petitions are PARTIALLY GRANTED and the May 24, 2004 Decisions of
Branch 72, Regional Trial Court of Olongapo City, in Civil Case No. 20-0-04 and Civil Case No.
22-0-04; and the February 14, 2005 Decision of the Court of Appeals in CA-G.R. SP No. 63284,
are MODIFIED insofar as they declared Article 2, Section 3.1 of Executive Order No. 156, void in
its entirety.

Said provision is declared VALID insofar as it applies to the Philippine territory outside the
presently fenced-in former Subic Naval Base area and VOID with respect to its application to the
secured fenced-in former Subic Naval Base area.

SO ORDERED.

CONSUELO YNARES-SANTIAGO
Associate Justice
WE CONCUR:

ARTEMIO V. PANGANIBAN
Chief Justice

REYNATO S. PUNO LEONARDO A. QUISUMBING


Associate Justice Associate Justice

ANGELINA SANDOVAL-GUTIERREZ ANTONIO T. CARPIO


Associate Justice Associate Justice

MA. ALICIA AUSTRIA-MARTINEZ RENATO C. CORONA


Associate Justice Associate Justice

CONCHITA CARPIO-MORALES ROMEO J. CALLEJO, SR.


Associate Justice Associate Justice

ADOLFO S. AZCUNA DANTE O. TINGA


Associate Justice Associate Justice

MINITA V. CHICO-NAZARIO CANCIO C. GARCIA


Associate Justice Associate Justice

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that the conclusions
in the above Decision were reached in consultation before the case was assigned to the writer of
the opinion of the Court.
ARTEMIO V. PANGANIBAN
Chief Justice

[1] Rollo (G.R. No. 164171), pp. 81-90.


[2] Id. at 68; rollo (G.R. No. 164172), p. 65. Penned by Judge Eliodoro G. Ubiadas.
[3] Rollo (G.R. No. 164172), pp. 78-86.
[4] The Executive Secretary, Secretary of Transportation and Communication, Commissioner of
Customs, Assistant Secretary and Head of the Land Transportation Office, Subic Bay Metropolitan
Authority (SBMA), Collector of Customs for the Port at Subic Bay Freeport Zone, and the Chief
of the Land Transportation Office at Subic Bay Freeport Zone.
[5] The dispositive portion thereof is identically worded as the quoted decretal portion of the
decision in Civil Case No. 20-0-04.
[6] Rollo (G.R. No. 168741), pp. 139-153.
[7] Id. at 264. Penned by Judge Eliodoro G. Ubiadas.
[8] Docketed as CA-G.R. SP. No. 83284.
[9] Dated February 14, 2005, rollo (G.R. No. 168741), p. 125. Penned by Associate Justice Perlita
J. Tria Tirona and concurred in by Associate Justices Delilah Vidallon-Magtolis and Jose C. Reyes,
Jr. Petitioners filed a motion for reconsideration but was denied by the Court of Appeals on June
28, 2004, id. at 126.
[10] Id. at 354.
[11] Miranda v. Aguirre, 373 Phil. 386, 397 (1999).
[12] Rollo (G.R. No. 164171), pp. 94-96 and rollo (G.R. No. 164172), p. 88.
[13] 422 Phil. 519, 531 (2001).
[14] Republic v. Sandiganbayan, G.R. No. 152154, November 18, 2003, 416 SCRA 133, 140.
[15] Coconut Oil Refiners Association, Inc. v. Torres, G.R. No. 132527, July 29, 2005, 465 SCRA
47, 62.
[16] Camarines Norte Electric Cooperative, Inc. v. Torres, 350 Phil. 315, 331 (1998).
[17] Cruz, Philippine Administrative Law, 2003 Edition, p. 24.
[18] Id. at 41.
[19] Essentially the same provision is embodied in the 1935 and 1973 Constitutions.
Constitution (1935), Art. VI, Sec 22, par. (2):
The Congress may by law authorize the President, subject to such limitations and restrictions as it
may impose, to fix, within specified limits, tariff rates, import or export quotas, and tonnage and
wharfage dues.
Constitution (1973), Art. VII, Sec 17, par. (2):
The Batasang Pambansa may by law authorize the President to fix within specified limits, and
subject to such limitations and restrictions as it may impose, tariff rates, import and export quotas,
tonnage and wharfage dues, and other duties or imposts.
[20] Bernas, S.J., The 1987 Constitution of the Philippines: A Commentary, 1996 Edition, p. 610.
[21] Enacted on July 17, 2000. See Filipino Metals Corporation v. Secretary of Trade and Industry,
G.R. No. 157498, July 15, 2005, 463 SCRA 616, 619.
[22] Secretary as defined under Section 4 (n) of the SMA refers to either the Secretary of the
Department of Trade and Industry in the case of non-agricultural products or the Secretary of the
Department of Agriculture in the case of agricultural products.
[23] Cruz, supra note 17 at 53.
[24] Commissioner of Internal Revenue v. Court of Appeals, 329 Phil. 987, 1007 (1996).
[25] Misamis Oriental Association of Coco Traders, Inc. v. Department of Finance Secretary, G.R.
No. 108524, November 10, 1994, 238 SCRA 63, 69.
[26] Supra.
[27] 453 Phil. 1043, 1058 (2003).
[28] Sec. 401. Flexible Clause.
a. In the interest of national economy, general welfare and/or national security, and subject to the
limitations herein prescribed, the President, upon recommendation of the National Economic and
Development Authority (hereinafter referred to as NEDA), is hereby empowered: (1) to increase,
reduce or remove existing protective rates of import duty (including any necessary change in
classification). The existing rates may be increased or decreased but in no case shall the reduced
rate of import duty be lower than the basic rate of ten (10) per cent ad valorem, nor shall the
increased rate of import duty be higher than a maximum of one hundred (100) per cent ad
valorem; (2) to establish import quota or to ban imports of any commodity, as may be necessary;
and (3) to impose an additional duty on all imports not exceeding ten (10) per cent ad valorem
whenever necessary; Provided, That upon periodic investigations by the Tariff Commission and
recommendation of the NEDA, the President may cause a gradual reduction of protection levels
granted in Section One Hundred and Four of this Code, including those subsequently granted
pursuant to this section.
b. Before any recommendation is submitted to the President by the NEDA pursuant to the
provisions of this section, except in the imposition of an additional duty not exceeding ten (10) per
cent ad valorem, the Commission shall conduct an investigation in the course of which they shall
hold public hearings wherein interested parties shall be afforded reasonable opportunity to be
present, produce evidence and to be heard. The Commission shall also hear the views and
recommendations of any government office, agency or instrumentality concerned. The
Commission shall submit their findings and recommendations to the NEDA within thirty (30) days
after the termination of the public hearings.
[29] SEC. 5. Conditions for the Application of General Safeguard Measures. The Secretary shall
apply a general safeguard measure upon a positive final determination of the Commission that a
product is being imported into the country in increased quantities, whether absolute or relative to
the domestic production, as to be a substantial cause of serious injury or threat thereof to the
domestic industry; however, in the case of non-agricultural products, the secretary shall first
establish that the application of such safeguard measures will be in the public interest.
SEC. 9. Formal Investigation. Within five (5) working days from receipt of the request from the
Secretary, the Commission shall publish the notice of the commencement of the investigation, and
public hearings which shall afford interested parties and consumers an opportunity to be present,
or to present evidence, to respond to the presentation of other parties and consumers, and
otherwise be heard. Evidence and positions with respect to the importation of the subject article
shall be submitted to the Commission within fifteen (15) days after the initiation of the
investigation by the Commission.
The Commission shall complete its investigation and submit its report to the Secretary within one
hundred twenty (120) calendar days from receipt of the referral by the Secretary, except when the
Secretary certifies that the same is urgent, in which case the Commission shall complete the
investigation and submit the report to the Secretary within sixty (60) days.
[30] Rollo (G.R. No. 168741), pp. 144-145; rollo (G.R. No. 164172), pp. 205-206; rollo (G.R. No.
164171), pp. 87-86.
[31] Coconut Oil Refiners Association, Inc. v. Torres, supra note 15 at 62-63.
[32] Section 13 of the Rules and Regulations Implementing RA 7227 provides: Establishment of
Secure Perimeters, Points of Entry and Duty and Tax Free Areas of the SBF. - Pending the
establishment of secure perimeters around the entire SBF, the SBMA shall have the authority to
establish and demarcate areas of the SBF with secure perimeters within which articles and
merchandise free of duties and internal revenue taxes may be limited, without prejudice to the
availment of other benefits conferred by the Act and these Rules in the SBF outside such areas.
The SBMA shall furthermore have the authority to establish, regulate and maintain points of entry
to the SBF or to any limited duty and tax-free areas of the SBF.
[33] RECORDS, SENATE 8TH CONGRESS, SESSION (JANUARY 14, 1992).
[34] Id.
[35] SEC. 45. Importation of Articles. In general, all articles may be imported by SBF Enterprises
into the SBF free of customs and import duties and national internal revenue taxes, except those
articles prohibited by the SBMA and those absolutely prohibited by law. (Rules and Regulations
Implementing RA 7227)
[36] Whereas clauses of EO 156.
[37] Rollo (G.R. No. 168741), pp. 77-79; rollo (G.R. No. 164172), p. 46; rollo (G.R. No. 164171),
p. 48.
[38] 369 Phil. 568, 579-580 (1999).
[39] Definitions, Section 3 (n).
[40] Lupangco v. Court of Appeals, G.R. No. L-77372, April 29, 1988, 160 SCRA 848, 858-859.
[41] 202 Phil. 925, 935-936 (1982).
[42] Vergara v. People, G.R. No. 160328, February 4, 2005, 450 SCRA 495, 508.
[43] 208 Phil. 490, 499-500 (1983).
[44] Supra note 40 at 860.
[45] G.R. No. 148339, February 23, 2005, 452 SCRA 174.
[46] 361 Phil. 229 (1999).
[47] Supra note 15.
[48] Article 7, Section 3:
Sec. 3. Separability Clause. The provisions of this Executive Order are hereby declared separable
and in the event any of such provisions is declared unconstitutional, the other provisions, which
are not affected, thereby remain in force and effect.

EN BANC
[G. R. No. 119775. October 24, 2003]

JOHN HAY PEOPLES ALTERNATIVE COALITION, MATEO CARIO FOUNDATION INC.,


CENTER FOR ALTERNATIVE SYSTEMS FOUNDATION INC., REGINA VICTORIA A.
BENAFIN REPRESENTED AND JOINED BY HER MOTHER MRS. ELISA BENAFIN,
IZABEL M. LUYK REPRESENTED AND JOINED BY HER MOTHER MRS. REBECCA
MOLINA LUYK, KATHERINE PE REPRESENTED AND JOINED BY HER MOTHER
ROSEMARIE G. PE, SOLEDAD S. CAMILO, ALICIA C. PACALSO ALIAS KEVAB, BETTY
I. STRASSER, RUBY C. GIRON, URSULA C. PEREZ ALIAS BA-YAY, EDILBERTO T.
CLARAVALL, CARMEN CAROMINA, LILIA G. YARANON, DIANE MONDOC, petitioners,
vs. VICTOR LIM, PRESIDENT, BASES CONVERSION DEVELOPMENT AUTHORITY;
JOHN HAY PORO POINT DEVELOPMENT CORPORATION, CITY OF BAGUIO, TUNTEX
(B.V.I.) CO. LTD., ASIAWORLD INTERNATIONALE GROUP, INC., DEPARTMENT OF
ENVIRONMENT AND NATURAL RESOURCES, respondents.
DECISION
CARPIO MORALES, J.:

By the present petition for prohibition, mandamus and declaratory relief with prayer for a
temporary restraining order (TRO) and/or writ of preliminary injunction, petitioners assail, in the
main, the constitutionality of Presidential Proclamation No. 420, Series of 1994, CREATING
AND DESIGNATING A PORTION OF THE AREA COVERED BY THE FORMER CAMP
JOHN [HAY] AS THE JOHN HAY SPECIAL ECONOMIC ZONE PURSUANT TO REPUBLIC
ACT NO. 7227.
Republic Act No. 7227, AN ACT ACCELERATING THE CONVERSION OF MILITARY
RESERVATIONS INTO OTHER PRODUCTIVE USES, CREATING THE BASES
CONVERSION AND DEVELOPMENT AUTHORITY FOR THIS PURPOSE, PROVIDING
FUNDS THEREFOR AND FOR OTHER PURPOSES, otherwise known as the Bases Conversion
and Development Act of 1992, which was enacted on March 13, 1992, set out the policy of the
government to accelerate the sound and balanced conversion into alternative productive uses of
the former military bases under the 1947 Philippines-United States of America Military Bases
Agreement, namely, the Clark and Subic military reservations as well as their extensions including
the John Hay Station (Camp John Hay or the camp) in the City of Baguio.[1]
As noted in its title, R.A. No. 7227 created public respondent Bases Conversion and Development
Authority[2] (BCDA), vesting it with powers pertaining to the multifarious aspects of carrying out
the ultimate objective of utilizing the base areas in accordance with the declared government
policy.
R.A. No. 7227 likewise created the Subic Special Economic [and Free Port] Zone (Subic SEZ) the
metes and bounds of which were to be delineated in a proclamation to be issued by the President
of the Philippines.[3]
R.A. No. 7227 granted the Subic SEZ incentives ranging from tax and duty-free importations,
exemption of businesses therein from local and national taxes, to other hallmarks of a liberalized
financial and business climate.[4]
And R.A. No. 7227 expressly gave authority to the President to create through executive
proclamation, subject to the concurrence of the local government units directly affected, other
Special Economic Zones (SEZ) in the areas covered respectively by the Clark military reservation,
the Wallace Air Station in San Fernando, La Union, and Camp John Hay.[5]
On August 16, 1993, BCDA entered into a Memorandum of Agreement and Escrow Agreement
with private respondents Tuntex (B.V.I.) Co., Ltd (TUNTEX) and Asiaworld Internationale Group,
Inc. (ASIAWORLD), private corporations registered under the laws of the British Virgin Islands,
preparatory to the formation of a joint venture for the development of Poro Point in La Union and
Camp John Hay as premier tourist destinations and recreation centers. Four months later or on
December 16, 1993, BCDA, TUNTEX and ASIAWORD executed a Joint Venture Agreement[6]
whereby they bound themselves to put up a joint venture company known as the Baguio
International Development and Management Corporation which would lease areas within Camp
John Hay and Poro Point for the purpose of turning such places into principal tourist and
recreation spots, as originally envisioned by the parties under their Memorandum of Agreement.
The Baguio City government meanwhile passed a number of resolutions in response to the actions
taken by BCDA as owner and administrator of Camp John Hay.
By Resolution[7] of September 29, 1993, the Sangguniang Panlungsod of Baguio City (the
sanggunian) officially asked BCDA to exclude all the barangays partly or totally located within
Camp John Hay from the reach or coverage of any plan or program for its development.
By a subsequent Resolution[8] dated January 19, 1994, the sanggunian sought from BCDA an
abdication, waiver or quitclaim of its ownership over the home lots being occupied by residents of
nine (9) barangays surrounding the military reservation.
Still by another resolution passed on February 21, 1994, the sanggunian adopted and submitted to
BCDA a 15-point concept for the development of Camp John Hay.[9] The sanggunians vision
expressed, among other things, a kind of development that affords protection to the environment,
the making of a family-oriented type of tourist destination, priority in employment opportunities
for Baguio residents and free access to the base area, guaranteed participation of the city
government in the management and operation of the camp, exclusion of the previously named
nine barangays from the area for development, and liability for local taxes of businesses to be
established within the camp.[10]
BCDA, TUNTEX and ASIAWORLD agreed to some, but rejected or modified the other proposals
of the sanggunian.[11] They stressed the need to declare Camp John Hay a SEZ as a condition
precedent to its full development in accordance with the mandate of R.A. No. 7227.[12]
On May 11, 1994, the sanggunian passed a resolution requesting the Mayor to order the
determination of realty taxes which may otherwise be collected from real properties of Camp John
Hay.[13] The resolution was intended to intelligently guide the sanggunian in determining its
position on whether Camp John Hay be declared a SEZ, it (the sanggunian) being of the view that
such declaration would exempt the camps property and the economic activity therein from local or
national taxation.
More than a month later, however, the sanggunian passed Resolution No. 255, (Series of 1994),
[14] seeking and supporting, subject to its concurrence, the issuance by then President Ramos of a
presidential proclamation declaring an area of 288.1 hectares of the camp as a SEZ in accordance
with the provisions of R.A. No. 7227. Together with this resolution was submitted a draft of the
proposed proclamation for consideration by the President.[15]
On July 5, 1994 then President Ramos issued Proclamation No. 420,[16] the title of which was
earlier indicated, which established a SEZ on a portion of Camp John Hay and which reads as
follows:
xxx
Pursuant to the powers vested in me by the law and the resolution of concurrence by the City
Council of Baguio, I, FIDEL V. RAMOS, President of the Philippines, do hereby create and
designate a portion of the area covered by the former John Hay reservation as embraced, covered,
and defined by the 1947 Military Bases Agreement between the Philippines and the United States
of America, as amended, as the John Hay Special Economic Zone, and accordingly order:

SECTION 1. Coverage of John Hay Special Economic Zone. The John Hay Special Economic
Zone shall cover the area consisting of Two Hundred Eighty Eight and one/tenth (288.1) hectares,
more or less, of the total of Six Hundred Seventy-Seven (677) hectares of the John Hay
Reservation, more or less, which have been surveyed and verified by the Department of
Environment and Natural Resources (DENR) as defined by the following technical description:

A parcel of land, situated in the City of Baguio, Province of Benguet, Island of Luzon, and
particularly described in survey plans Psd-131102-002639 and Ccs-131102-000030 as approved
on 16 August 1993 and 26 August 1993, respectively, by the Department of Environment and
Natural Resources, in detail containing :

Lot 1, Lot 2, Lot 3, Lot 4, Lot 5, Lot 6, Lot 7, Lot 13, Lot 14, Lot 15, and Lot 20 of Ccs-131102-
000030

-and-

Lot 3, Lot 4, Lot 5, Lot 6, Lot 7, Lot 8, Lot 9, Lot 10, Lot 11, Lot 14, Lot 15, Lot 16, Lot 17, and
Lot 18 of Psd-131102-002639 being portions of TCT No. T-3812, LRC Rec. No. 87.

With a combined area of TWO HUNDRED EIGHTY EIGHT AND ONE/TENTH HECTARES
(288.1 hectares); Provided that the area consisting of approximately Six and two/tenth (6.2)
hectares, more or less, presently occupied by the VOA and the residence of the Ambassador of the
United States, shall be considered as part of the SEZ only upon turnover of the properties to the
government of the Republic of the Philippines.

Sec. 2. Governing Body of the John Hay Special Economic Zone. Pursuant to Section 15 of
Republic Act No. 7227, the Bases Conversion and Development Authority is hereby established as
the governing body of the John Hay Special Economic Zone and, as such, authorized to determine
the utilization and disposition of the lands comprising it, subject to private rights, if any, and in
consultation and coordination with the City Government of Baguio after consultation with its
inhabitants, and to promulgate the necessary policies, rules, and regulations to govern and regulate
the zone thru the John Hay Poro Point Development Corporation, which is its implementing arm
for its economic development and optimum utilization.

Sec. 3. Investment Climate in John Hay Special Economic Zone. Pursuant to Section 5(m) and
Section 15 of Republic Act No. 7227, the John Hay Poro Point Development Corporation shall
implement all necessary policies, rules, and regulations governing the zone, including investment
incentives, in consultation with pertinent government departments. Among others, the zone shall
have all the applicable incentives of the Special Economic Zone under Section 12 of Republic Act
No. 7227 and those applicable incentives granted in the Export Processing Zones, the Omnibus
Investment Code of 1987, the Foreign Investment Act of 1991, and new investment laws that may
hereinafter be enacted.

Sec. 4. Role of Departments, Bureaus, Offices, Agencies and Instrumentalities. All Heads of
departments, bureaus, offices, agencies, and instrumentalities of the government are hereby
directed to give full support to Bases Conversion and Development Authority and/or its
implementing subsidiary or joint venture to facilitate the necessary approvals to expedite the
implementation of various projects of the conversion program.

Sec. 5. Local Authority. Except as herein provided, the affected local government units shall retain
their basic autonomy and identity.

Sec. 6. Repealing Clause. All orders, rules, and regulations, or parts thereof, which are
inconsistent with the provisions of this Proclamation, are hereby repealed, amended, or modified
accordingly.

Sec. 7. Effectivity. This proclamation shall take effect immediately.

Done in the City of Manila, this 5th day of July, in the year of Our Lord, nineteen hundred and
ninety-four.

The issuance of Proclamation No. 420 spawned the present petition[17] for prohibition,
mandamus and declaratory relief which was filed on April 25, 1995 challenging, in the main, its
constitutionality or validity as well as the legality of the Memorandum of Agreement and Joint
Venture Agreement between public respondent BCDA and private respondents TUNTEX and
ASIAWORLD.
Petitioners allege as grounds for the allowance of the petition the following:
I. PRESIDENTIAL PROCLAMATION NO. 420, SERIES OF 1990 (sic) IN SO FAR AS IT
GRANTS TAX EXEMPTIONS IS INVALID AND ILLEGAL AS IT IS AN
UNCONSTITUTIONAL EXERCISE BY THE PRESIDENT OF A POWER GRANTED ONLY
TO THE LEGISLATURE.
II. PRESIDENTIAL PROCLAMATION NO. 420, IN SO FAR AS IT LIMITS THE POWERS
AND INTERFERES WITH THE AUTONOMY OF THE CITY OF BAGUIO IS INVALID,
ILLEGAL AND UNCONSTITUTIONAL.
III. PRESIDENTIAL PROCLAMATION NO. 420, SERIES OF 1994 IS UNCONSTITUTIONAL
IN THAT IT VIOLATES THE RULE THAT ALL TAXES SHOULD BE UNIFORM AND
EQUITABLE.
IV. THE MEMORANDUM OF AGREEMENT ENTERED INTO BY AND BETWEEN
PRIVATE AND PUBLIC RESPONDENTS BASES CONVERSION DEVELOPMENT
AUTHORITY HAVING BEEN ENTERED INTO ONLY BY DIRECT NEGOTIATION IS
ILLEGAL.
V. THE TERMS AND CONDITIONS OF THE MEMORANDUM OF AGREEMENT ENTERED
INTO BY AND BETWEEN PRIVATE AND PUBLIC RESPONDENT BASES CONVERSION
DEVELOPMENT AUTHORITY IS (sic) ILLEGAL.
VI. THE CONCEPTUAL DEVELOPMENT PLAN OF RESPONDENTS NOT HAVING
UNDERGONE ENVIRONMENTAL IMPACT ASSESSMENT IS BEING ILLEGALLY
CONSIDERED WITHOUT A VALID ENVIRONMENTAL IMPACT ASSESSMENT.
A temporary restraining order and/or writ of preliminary injunction was prayed for to enjoin
BCDA, John Hay Poro Point Development Corporation and the city government from
implementing Proclamation No. 420, and TUNTEX and ASIAWORLD from proceeding with
their plan respecting Camp John Hays development pursuant to their Joint Venture Agreement
with BCDA.[18]
Public respondents, by their separate Comments, allege as moot and academic the issues raised by
the petition, the questioned Memorandum of Agreement and Joint Venture Agreement having
already been deemed abandoned by the inaction of the parties thereto prior to the filing of the
petition as in fact, by letter of November 21, 1995, BCDA formally notified TUNTEX and
ASIAWORLD of the revocation of their said agreements.[19]
In maintaining the validity of Proclamation No. 420, respondents contend that by extending to the
John Hay SEZ economic incentives similar to those enjoyed by the Subic SEZ which was
established under R.A. No. 7227, the proclamation is merely implementing the legislative intent of
said law to turn the US military bases into hubs of business activity or investment. They
underscore the point that the governments policy of bases conversion can not be achieved without
extending the same tax exemptions granted by R.A. No. 7227 to Subic SEZ to other SEZs.
Denying that Proclamation No. 420 is in derogation of the local autonomy of Baguio City or that it
is violative of the constitutional guarantee of equal protection, respondents assail petitioners lack
of standing to bring the present suit even as taxpayers and in the absence of any actual case or
controversy to warrant this Courts exercise of its power of judicial review over the proclamation.
Finally, respondents seek the outright dismissal of the petition for having been filed in disregard of
the hierarchy of courts and of the doctrine of exhaustion of administrative remedies.
Replying,[20] petitioners aver that the doctrine of exhaustion of administrative remedies finds no
application herein since they are invoking the exclusive authority of this Court under Section 21 of
R.A. No. 7227 to enjoin or restrain implementation of projects for conversion of the base areas;
that the established exceptions to the aforesaid doctrine obtain in the present petition; and that they
possess the standing to bring the petition which is a taxpayers suit.
Public respondents have filed their Rejoinder[21] and the parties have filed their respective
memoranda.
Before dwelling on the core issues, this Court shall first address the preliminary procedural
questions confronting the petition.
The judicial policy is and has always been that this Court will not entertain direct resort to it
except when the redress sought cannot be obtained in the proper courts, or when exceptional and
compelling circumstances warrant availment of a remedy within and calling for the exercise of
this Courts primary jurisdiction.[22] Neither will it entertain an action for declaratory relief, which
is partly the nature of this petition, over which it has no original jurisdiction.
Nonetheless, as it is only this Court which has the power under Section 21[23] of R.A. No. 7227
to enjoin implementation of projects for the development of the former US military reservations,
the issuance of which injunction petitioners pray for, petitioners direct filing of the present petition
with it is allowed. Over and above this procedural objection to the present suit, this Court retains
full discretionary power to take cognizance of a petition filed directly to it if compelling reasons,
or the nature and importance of the issues raised, warrant.[24] Besides, remanding the case to the
lower courts now would just unduly prolong adjudication of the issues.
The transformation of a portion of the area covered by Camp John Hay into a SEZ is not simply a
re-classification of an area, a mere ascription of a status to a place. It involves turning the former
US military reservation into a focal point for investments by both local and foreign entities. It is to
be made a site of vigorous business activity, ultimately serving as a spur to the countrys long
awaited economic growth. For, as R.A. No. 7227 unequivocally declares, it is the governments
policy to enhance the benefits to be derived from the base areas in order to promote the economic
and social development of Central Luzon in particular and the country in general.[25] Like the
Subic SEZ, the John Hay SEZ should also be turned into a self-sustaining, industrial, commercial,
financial and investment center.[26]
More than the economic interests at stake, the development of Camp John Hay as well as of the
other base areas unquestionably has critical links to a host of environmental and social concerns.
Whatever use to which these lands will be devoted will set a chain of events that can affect one
way or another the social and economic way of life of the communities where the bases are
located, and ultimately the nation in general.
Underscoring the fragility of Baguio Citys ecology with its problem on the scarcity of its water
supply, petitioners point out that the local and national government are faced with the challenge of
how to provide for an ecologically sustainable, environmentally sound, equitable transition for the
city in the wake of Camp John Hays reversion to the mass of government property.[27] But that is
why R.A. No. 7227 emphasizes the sound and balanced conversion of the Clark and Subic
military reservations and their extensions consistent with ecological and environmental standards.
[28] It cannot thus be gainsaid that the matter of conversion of the US bases into SEZs, in this case
Camp John Hay, assumes importance of a national magnitude.
Convinced then that the present petition embodies crucial issues, this Court assumes jurisdiction
over the petition.
As far as the questioned agreements between BCDA and TUNTEX and ASIAWORLD are
concerned, the legal questions being raised thereon by petitioners have indeed been rendered moot
and academic by the revocation of such agreements. There are, however, other issues posed by the
petition, those which center on the constitutionality of Proclamation No. 420, which have not been
mooted by the said supervening event upon application of the rules for the judicial scrutiny of
constitutional cases. The issues boil down to:
(1) Whether the present petition complies with the requirements for this Courts exercise of
jurisdiction over constitutional issues;
(2) Whether Proclamation No. 420 is constitutional by providing for national and local tax
exemption within and granting other economic incentives to the John Hay Special Economic
Zone; and
(3) Whether Proclamation No. 420 is constitutional for limiting or interfering with the local
autonomy of Baguio City;
It is settled that when questions of constitutional significance are raised, the court can exercise its
power of judicial review only if the following requisites are present: (1) the existence of an actual
and appropriate case; (2) a personal and substantial interest of the party raising the constitutional
question; (3) the exercise of judicial review is pleaded at the earliest opportunity; and (4) the
constitutional question is the lis mota of the case.[29]
An actual case or controversy refers to an existing case or controversy that is appropriate or ripe
for determination, not conjectural or anticipatory.[30] The controversy needs to be definite and
concrete, bearing upon the legal relations of parties who are pitted against each other due to their
adverse legal interests.[31] There is in the present case a real clash of interests and rights between
petitioners and respondents arising from the issuance of a presidential proclamation that converts a
portion of the area covered by Camp John Hay into a SEZ, the former insisting that such
proclamation contains unconstitutional provisions, the latter claiming otherwise.
R.A. No. 7227 expressly requires the concurrence of the affected local government units to the
creation of SEZs out of all the base areas in the country.[32] The grant by the law on local
government units of the right of concurrence on the bases conversion is equivalent to vesting a
legal standing on them, for it is in effect a recognition of the real interests that communities nearby
or surrounding a particular base area have in its utilization. Thus, the interest of petitioners, being
inhabitants of Baguio, in assailing the legality of Proclamation No. 420, is personal and substantial
such that they have sustained or will sustain direct injury as a result of the government act being
challenged.[33] Theirs is a material interest, an interest in issue affected by the proclamation and
not merely an interest in the question involved or an incidental interest,[34] for what is at stake in
the enforcement of Proclamation No. 420 is the very economic and social existence of the people
of Baguio City.
Petitioners locus standi parallels that of the petitioner and other residents of Bataan, specially of
the town of Limay, in Garcia v. Board of Investments[35] where this Court characterized their
interest in the establishment of a petrochemical plant in their place as actual, real, vital and legal,
for it would affect not only their economic life but even the air they breathe.
Moreover, petitioners Edilberto T. Claravall and Lilia G. Yaranon were duly elected councilors of
Baguio at the time, engaged in the local governance of Baguio City and whose duties included
deciding for and on behalf of their constituents the question of whether to concur with the
declaration of a portion of the area covered by Camp John Hay as a SEZ. Certainly then,
petitioners Claravall and Yaranon, as city officials who voted against[36] the sanggunian
Resolution No. 255 (Series of 1994) supporting the issuance of the now challenged Proclamation
No. 420, have legal standing to bring the present petition.
That there is herein a dispute on legal rights and interests is thus beyond doubt. The mootness of
the issues concerning the questioned agreements between public and private respondents is of no
moment.
By the mere enactment of the questioned law or the approval of the challenged act, the dispute is
deemed to have ripened into a judicial controversy even without any other overt act. Indeed, even
a singular violation of the Constitution and/or the law is enough to awaken judicial duty.[37]

As to the third and fourth requisites of a judicial inquiry, there is likewise no question that they
have been complied with in the case at bar. This is an action filed purposely to bring forth
constitutional issues, ruling on which this Court must take up. Besides, respondents never raised
issues with respect to these requisites, hence, they are deemed waived.
Having cleared the way for judicial review, the constitutionality of Proclamation No. 420, as
framed in the second and third issues above, must now be addressed squarely.
The second issue refers to petitioners objection against the creation by Proclamation No. 420 of a
regime of tax exemption within the John Hay SEZ. Petitioners argue that nowhere in R. A. No.
7227 is there a grant of tax exemption to SEZs yet to be established in base areas, unlike the grant
under Section 12 thereof of tax exemption and investment incentives to the therein established
Subic SEZ. The grant of tax exemption to the John Hay SEZ, petitioners conclude, thus
contravenes Article VI, Section 28 (4) of the Constitution which provides that No law granting any
tax exemption shall be passed without the concurrence of a majority of all the members of
Congress.
Section 3 of Proclamation No. 420, the challenged provision, reads:
Sec. 3. Investment Climate in John Hay Special Economic Zone. Pursuant to Section 5(m) and
Section 15 of Republic Act No. 7227, the John Hay Poro Point Development Corporation shall
implement all necessary policies, rules, and regulations governing the zone, including investment
incentives, in consultation with pertinent government departments. Among others, the zone shall
have all the applicable incentives of the Special Economic Zone under Section 12 of Republic Act
No. 7227 and those applicable incentives granted in the Export Processing Zones, the Omnibus
Investment Code of 1987, the Foreign Investment Act of 1991, and new investment laws that may
hereinafter be enacted. (Emphasis and underscoring supplied)

Upon the other hand, Section 12 of R.A. No. 7227 provides:


xxx

(a) Within the framework and subject to the mandate and limitations of the Constitution and the
pertinent provisions of the Local Government Code, the Subic Special Economic Zone shall be
developed into a self-sustaining, industrial, commercial, financial and investment center to
generate employment opportunities in and around the zone and to attract and promote productive
foreign investments;

b) The Subic Special Economic Zone shall be operated and managed as a separate customs
territory ensuring free flow or movement of goods and capital within, into and exported out of the
Subic Special Economic Zone, as well as provide incentives such as tax and duty free importations
of raw materials, capital and equipment. However, exportation or removal of goods from the
territory of the Subic Special Economic Zone to the other parts of the Philippine territory shall be
subject to customs duties and taxes under the Customs and Tariff Code and other relevant tax laws
of the Philippines;

(c) The provisions of existing laws, rules and regulations to the contrary notwithstanding, no
taxes, local and national, shall be imposed within the Subic Special Economic Zone. In lieu of
paying taxes, three percent (3%) of the gross income earned by all businesses and enterprises
within the Subic Special Economic Zone shall be remitted to the National Government, one
percent (1%) each to the local government units affected by the declaration of the zone in
proportion to their population area, and other factors. In addition, there is hereby established a
development fund of one percent (1%) of the gross income earned by all businesses and
enterprises within the Subic Special Economic Zone to be utilized for the Municipality of Subic,
and other municipalities contiguous to be base areas. In case of conflict between national and local
laws with respect to tax exemption privileges in the Subic Special Economic Zone, the same shall
be resolved in favor of the latter;

(d) No exchange control policy shall be applied and free markets for foreign exchange, gold,
securities and futures shall be allowed and maintained in the Subic Special Economic Zone;

(e) The Central Bank, through the Monetary Board, shall supervise and regulate the operations of
banks and other financial institutions within the Subic Special Economic Zone;

(f) Banking and Finance shall be liberalized with the establishment of foreign currency depository
units of local commercial banks and offshore banking units of foreign banks with minimum
Central Bank regulation;

(g) Any investor within the Subic Special Economic Zone whose continuing investment shall not
be less than Two Hundred fifty thousand dollars ($250,000), his/her spouse and dependent
children under twenty-one (21) years of age, shall be granted permanent resident status within the
Subic Special Economic Zone. They shall have freedom of ingress and egress to and from the
Subic Special Economic Zone without any need of special authorization from the Bureau of
Immigration and Deportation. The Subic Bay Metropolitan Authority referred to in Section 13 of
this Act may also issue working visas renewable every two (2) years to foreign executives and
other aliens possessing highly-technical skills which no Filipino within the Subic Special
Economic Zone possesses, as certified by the Department of Labor and Employment. The names
of aliens granted permanent residence status and working visas by the Subic Bay Metropolitan
Authority shall be reported to the Bureau of Immigration and Deportation within thirty (30) days
after issuance thereof;

x x x (Emphasis supplied)

It is clear that under Section 12 of R.A. No. 7227 it is only the Subic SEZ which was granted by
Congress with tax exemption, investment incentives and the like. There is no express extension of
the aforesaid benefits to other SEZs still to be created at the time via presidential proclamation.
The deliberations of the Senate confirm the exclusivity to Subic SEZ of the tax and investment
privileges accorded it under the law, as the following exchanges between our lawmakers show
during the second reading of the precursor bill of R.A. No. 7227 with respect to the investment
policies that would govern Subic SEZ which are now embodied in the aforesaid Section 12
thereof:
xxx

Senator Maceda: This is what I was talking about. We get into problems here because all of these
following policies are centered around the concept of free port. And in the main paragraph above,
we have declared both Clark and Subic as special economic zones, subject to these policies which
are, in effect, a free-port arrangement.

Senator Angara: The Gentleman is absolutely correct, Mr. President. So we must confine these
policies only to Subic.

May I withdraw then my amendment, and instead provide that THE SPECIAL ECONOMIC
ZONE OF SUBIC SHALL BE ESTABLISHED IN ACCORDANCE WITH THE FOLLOWING
POLICIES. Subject to style, Mr. President.

Thus, it is very clear that these principles and policies are applicable only to Subic as a free port.

Senator Paterno: Mr. President.

The President: Senator Paterno is recognized.

Senator Paterno: I take it that the amendment suggested by Senator Angara would then prevent the
establishment of other special economic zones observing these policies.

Senator Angara: No, Mr. President, because during our short caucus, Senator Laurel raised the
point that if we give this delegation to the President to establish other economic zones, that may be
an unwarranted delegation.

So we agreed that we will simply limit the definition of powers and description of the zone to
Subic, but that does not exclude the possibility of creating other economic zones within the
baselands.

Senator Paterno: But if that amendment is followed, no other special economic zone may be
created under authority of this particular bill. Is that correct, Mr. President?

Senator Angara: Under this specific provision, yes, Mr. President. This provision now will be
confined only to Subic.[38]

x x x (Underscoring supplied).

As gathered from the earlier-quoted Section 12 of R.A. No. 7227, the privileges given to Subic
SEZ consist principally of exemption from tariff or customs duties, national and local taxes of
business entities therein (paragraphs (b) and (c)), free market and trade of specified goods or
properties (paragraph d), liberalized banking and finance (paragraph f), and relaxed immigration
rules for foreign investors (paragraph g). Yet, apart from these, Proclamation No. 420 also makes
available to the John Hay SEZ benefits existing in other laws such as the privilege of export
processing zone-based businesses of importing capital equipment and raw materials free from
taxes, duties and other restrictions;[39] tax and duty exemptions, tax holiday, tax credit, and other
incentives under the Omnibus Investments Code of 1987;[40] and the applicability to the subject
zone of rules governing foreign investments in the Philippines.[41]
While the grant of economic incentives may be essential to the creation and success of SEZs, free
trade zones and the like, the grant thereof to the John Hay SEZ cannot be sustained. The incentives
under R.A. No. 7227 are exclusive only to the Subic SEZ, hence, the extension of the same to the
John Hay SEZ finds no support therein. Neither does the same grant of privileges to the John Hay
SEZ find support in the other laws specified under Section 3 of Proclamation No. 420, which laws
were already extant before the issuance of the proclamation or the enactment of R.A. No. 7227.
More importantly, the nature of most of the assailed privileges is one of tax exemption. It is the
legislature, unless limited by a provision of the state constitution, that has full power to exempt
any person or corporation or class of property from taxation, its power to exempt being as broad as
its power to tax.[42] Other than Congress, the Constitution may itself provide for specific tax
exemptions,[43] or local governments may pass ordinances on exemption only from local taxes.
[44]
The challenged grant of tax exemption would circumvent the Constitutions imposition that a law
granting any tax exemption must have the concurrence of a majority of all the members of
Congress.[45] In the same vein, the other kinds of privileges extended to the John Hay SEZ are by
tradition and usage for Congress to legislate upon.
Contrary to public respondents suggestions, the claimed statutory exemption of the John Hay SEZ
from taxation should be manifest and unmistakable from the language of the law on which it is
based; it must be expressly granted in a statute stated in a language too clear to be mistaken.[46]
Tax exemption cannot be implied as it must be categorically and unmistakably expressed.[47]
If it were the intent of the legislature to grant to the John Hay SEZ the same tax exemption and
incentives given to the Subic SEZ, it would have so expressly provided in the R.A. No. 7227.
This Court no doubt can void an act or policy of the political departments of the government on
either of two groundsinfringement of the Constitution or grave abuse of discretion.[48]
This Court then declares that the grant by Proclamation No. 420 of tax exemption and other
privileges to the John Hay SEZ is void for being violative of the Constitution. This renders it
unnecessary to still dwell on petitioners claim that the same grant violates the equal protection
guarantee.
With respect to the final issue raised by petitioners that Proclamation No. 420 is unconstitutional
for being in derogation of Baguio Citys local autonomy, objection is specifically mounted against
Section 2 thereof in which BCDA is set up as the governing body of the John Hay SEZ.[49]
Petitioners argue that there is no authority of the President to subject the John Hay SEZ to the
governance of BCDA which has just oversight functions over SEZ; and that to do so is to diminish
the city governments power over an area within its jurisdiction, hence, Proclamation No. 420
unlawfully gives the President power of control over the local government instead of just mere
supervision.
Petitioners arguments are bereft of merit. Under R.A. No. 7227, the BCDA is entrusted with,
among other things, the following purpose:[50]
xxx

(a) To own, hold and/or administer the military reservations of John Hay Air Station, Wallace Air
Station, ODonnell Transmitter Station, San Miguel Naval Communications Station, Mt. Sta. Rita
Station (Hermosa, Bataan) and those portions of Metro Manila Camps which may be transferred
to it by the President;

x x x (Underscoring supplied)
With such broad rights of ownership and administration vested in BCDA over Camp John Hay,
BCDA virtually has control over it, subject to certain limitations provided for by law. By
designating BCDA as the governing agency of the John Hay SEZ, the law merely emphasizes or
reiterates the statutory role or functions it has been granted.
The unconstitutionality of the grant of tax immunity and financial incentives as contained in the
second sentence of Section 3 of Proclamation No. 420 notwithstanding, the entire assailed
proclamation cannot be declared unconstitutional, the other parts thereof not being repugnant to
law or the Constitution. The delineation and declaration of a portion of the area covered by Camp
John Hay as a SEZ was well within the powers of the President to do so by means of a
proclamation.[51] The requisite prior concurrence by the Baguio City government to such
proclamation appears to have been given in the form of a duly enacted resolution by the
sanggunian. The other provisions of the proclamation had been proven to be consistent with R.A.
No. 7227.
Where part of a statute is void as contrary to the Constitution, while another part is valid, the valid
portion, if separable from the invalid, may stand and be enforced.[52] This Court finds that the
other provisions in Proclamation No. 420 converting a delineated portion of Camp John Hay into
the John Hay SEZ are separable from the invalid second sentence of Section 3 thereof, hence they
stand.
WHEREFORE, the second sentence of Section 3 of Proclamation No. 420 is hereby declared
NULL AND VOID and is accordingly declared of no legal force and effect. Public respondents are
hereby enjoined from implementing the aforesaid void provision.
Proclamation No. 420, without the invalidated portion, remains valid and effective.
SO ORDERED.
Davide, Jr., C.J., Bellosillo, Vitug, Panganiban, Sandoval-Gutierrez, Carpio, Austria-Martinez,
Callejo, Sr., Azcuna, and Tinga, JJ., concur.
Puno, J., no part, due to relationship.
Quisumbing, J., due prior action, no part.
Ynares-Santiago, and Corona, JJ., on leave.

[1] R.A. 7227, Section 2.


[2] Id., Section 3.
[3] Id., Section 12.
[4] Ibid.
[5] R. A. 7227, Section 15.
[6] Rollo, Annex A, pp. 45-57.
[7] Id., Annex C, pp. 64-65.
[8] Rollo, Annex D, pp. 66-67.
[9] Id., Annex E, pp. 68-69.
[10] Id., Annex E-1, pp. 70-71.
[11] Id., Annex B, pp. 58-63.
[12] Ibid.
[13] Rollo, Annex F, p. 72.
[14] Id., Annex H, p. 76.
[15] Id. at 77-78.
[16] Id. at 79-81.
[17] Rollo, pp. 2-44.
[18] Rollo, pp. 22-23.
[19] Rollo, p. 167.
[20] Rollo, pp. 181-200.
[21] Id. at 235-240.
[22] Tano v. Socrates, 278 SCRA 154 [1997] citing Santiago v. Vasquez, 217 SCRA 633 [1993].
[23] R. A. 7227, Section 21 provides: The implementation of the projects for the conversion into
alternative productive uses of the military reservations are urgent and necessary and shall not be
restrained or enjoined except by an order issued by the Supreme Court of the Philippines.
[24] Fortich v. Corona, 289 SCRA 624 [1998].
[25] R.A. 7227, Section 2.
[26] Id. at Section 12 (a).
[27] Rollo, pp. 20-21.
[28] R. A. 7227, Section 4 (b).
[29] Integrated Bar of the Philippines v. Zamora, 338 SCRA 81 [2000].
[30] Board of Optometry v. Colet, 260 SCRA 88 [1996].
[31] Cruz, Philippine Political Law, p. 258 [1998].
[32] Vide R. A. 7227, Sections 12 and 15.
[33] Joya v. Presidential Commission on Good Government, 225 SCRA 568 (1993).
[34] Ibid.
[35] 177 SCRA 374 (1989).
[36] Rollo, Annex H, p. 76.
[37] Pimentel, Jr. v. Aguirre, 336 SCRA 201 (2000).
[38] Record of the Senate, Vol. III, N. 56, p. 329 [January 22, 1992].
[39] Vide R.A. 7916, The Special Economic Zone Act of 1995.
[40] There are a multitude of incentives under the Omnibus Investments Code of 1987 depending
on the classification of the business or enterprise that is covered by the Code.
[41] See R.A. 7042, Foreign Investments Act of 1991.
[42] 71 Am. Jur. 2d 309.
[43] Vide CONSTITUTION, Article VI, Section 28 (3).
[44] Vide R.A. 7160, Section 192.
[45] CONSTITUTION, Article VI, Section 28 (4).
[46] Commissioner of Internal Revenue v. Court of Appeals, 298 SCRA 83 (1998).
[47] National Development Company v. Commissioner of Internal Revenue, 151 SCRA 472
(1987).
[48] Garcia v. Corona, Separate Opinion of Justice Panganiban , 321 SCRA 218, 237 (1999).
[49] Proc. No. 420, Section 2. Governing Body of the John Hay Special Economic Zone. Pursuant
to Section 15 of Republic Act No. 7227, the Bases Conversion and Development Authority is
hereby established as the governing body of the John Hay Special Economic Zone and, as such,
authorized to determine the utilization and disposition of the lands comprising it, subject to private
rights, if any, and in consultation and coordination with the City Government of Baguio after
consultation with its inhabitants, and to promulgate the necessary policies, rules, and regulations
to govern and regulate the zone thru the John Hay Poro Point Development Corporation, which is
its implementing arm for its economic development and optimum utilization.
[50] R.A. 7227, Section 4.
[51] R.A. 7227, Section 15.
[52] Agpalo, Statutory Construction, pp. 27-28 [1995].
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Republic of the Philippines


SUPREME COURT
Manila

THIRD DIVISION

G.R. No. L-69259 January 26, 1988

DELPHER TRADES CORPORATION, and DELPHIN PACHECO, petitioners,


vs.
INTERMEDIATE APPELLATE COURT and HYDRO PIPES PHILIPPINES, INC., respondents.

GUTIERREZ, JR., J.:

The petitioners question the decision of the Intermediate Appellate Court which sustained the
private respondent's contention that the deed of exchange whereby Delfin Pacheco and Pelagia
Pacheco conveyed a parcel of land to Delpher Trades Corporation in exchange for 2,500 shares of
stock was actually a deed of sale which violated a right of first refusal under a lease contract.

Briefly, the facts of the case are summarized as follows:

In 1974, Delfin Pacheco and his sister, Pelagia Pacheco, were the owners of 27,169 square meters
of real estate Identified as Lot. No. 1095, Malinta Estate, in the Municipality of Polo (now
Valenzuela), Province of Bulacan (now Metro Manila) which is covered by Transfer Certificate of
Title No. T-4240 of the Bulacan land registry.

On April 3, 1974, the said co-owners leased to Construction Components International Inc. the
same property and providing that during the existence or after the term of this lease the lessor
should he decide to sell the property leased shall first offer the same to the lessee and the letter has
the priority to buy under similar conditions (Exhibits A to A-5)

On August 3, 1974, lessee Construction Components International, Inc. assigned its rights and
obligations under the contract of lease in favor of Hydro Pipes Philippines, Inc. with the signed
conformity and consent of lessors Delfin Pacheco and Pelagia Pacheco (Exhs. B to B-6 inclusive)

The contract of lease, as well as the assignment of lease were annotated at he back of the title, as
per stipulation of the parties (Exhs. A to D-3 inclusive)
On January 3, 1976, a deed of exchange was executed between lessors Delfin and Pelagia Pacheco
and defendant Delpher Trades Corporation whereby the former conveyed to the latter the leased
property (TCT No.T-4240) together with another parcel of land also located in Malinta Estate,
Valenzuela, Metro Manila (TCT No. 4273) for 2,500 shares of stock of defendant corporation with
a total value of P1,500,000.00 (Exhs. C to C-5, inclusive) (pp. 44-45, Rollo)

On the ground that it was not given the first option to buy the leased property pursuant to the
proviso in the lease agreement, respondent Hydro Pipes Philippines, Inc., filed an amended
complaint for reconveyance of Lot. No. 1095 in its favor under conditions similar to those
whereby Delpher Trades Corporation acquired the property from Pelagia Pacheco and Delphin
Pacheco.

After trial, the Court of First Instance of Bulacan ruled in favor of the plaintiff. The dispositive
portion of the decision reads:

ACCORDINGLY, the judgment is hereby rendered declaring the valid existence of the plaintiffs
preferential right to acquire the subject property (right of first refusal) and ordering the defendants
and all persons deriving rights therefrom to convey the said property to plaintiff who may offer to
acquire the same at the rate of P14.00 per square meter, more or less, for Lot 1095 whose area is
27,169 square meters only. Without pronouncement as to attorney's fees and costs. (Appendix I;
Rec., pp. 246- 247). (Appellant's Brief, pp. 1-2; p. 134, Rollo)

The lower court's decision was affirmed on appeal by the Intermediate Appellate Court.

The defendants-appellants, now the petitioners, filed a petition for certiorari to review the
appellate court's decision.

We initially denied the petition but upon motion for reconsideration, we set aside the resolution
denying the petition and gave it due course.

The petitioners allege that:

The denial of the petition will work great injustice to the petitioners, in that:

1. Respondent Hydro Pipes Philippines, Inc, ("private respondent") will acquire from petitioners
a parcel of industrial land consisting of 27,169 square meters or 2.7 hectares (located right after
the Valenzuela, Bulacan exit of the toll expressway) for only P14/sq. meter, or a total of P380,366,
although the prevailing value thereof is approximately P300/sq. meter or P8.1 Million;

2. Private respondent is allowed to exercise its right of first refusal even if there is no "sale" or
transfer of actual ownership interests by petitioners to third parties; and

3. Assuming arguendo that there has been a transfer of actual ownership interests, private
respondent will acquire the land not under "similar conditions" by which it was transferred to
petitioner Delpher Trades Corporation, as provided in the same contractual provision invoked by
private respondent. (pp. 251-252, Rollo)

The resolution of the case hinges on whether or not the "Deed of Exchange" of the properties
executed by the Pachecos on the one hand and the Delpher Trades Corporation on the other was
meant to be a contract of sale which, in effect, prejudiced the private respondent's right of first
refusal over the leased property included in the "deed of exchange."

Eduardo Neria, a certified public accountant and son-in-law of the late Pelagia Pacheco testified
that Delpher Trades Corporation is a family corporation; that the corporation was organized by the
children of the two spouses (spouses Pelagia Pacheco and Benjamin Hernandez and spouses
Delfin Pacheco and Pilar Angeles) who owned in common the parcel of land leased to Hydro
Pipes Philippines in order to perpetuate their control over the property through the corporation and
to avoid taxes; that in order to accomplish this end, two pieces of real estate, including Lot No.
1095 which had been leased to Hydro Pipes Philippines, were transferred to the corporation; that
the leased property was transferred to the corporation by virtue of a deed of exchange of property;
that in exchange for these properties, Pelagia and Delfin acquired 2,500 unissued no par value
shares of stock which are equivalent to a 55% majority in the corporation because the other
owners only owned 2,000 shares; and that at the time of incorporation, he knew all about the
contract of lease of Lot. No. 1095 to Hydro Pipes Philippines. In the petitioners' motion for
reconsideration, they refer to this scheme as "estate planning." (p. 252, Rollo)

Under this factual backdrop, the petitioners contend that there was actually no transfer of
ownership of the subject parcel of land since the Pachecos remained in control of the property.
Thus, the petitioners allege: "Considering that the beneficial ownership and control of petitioner
corporation remained in the hands of the original co-owners, there was no transfer of actual
ownership interests over the land when the same was transferred to petitioner corporation in
exchange for the latter's shares of stock. The transfer of ownership, if anything, was merely in
form but not in substance. In reality, petitioner corporation is a mere alter ego or conduit of the
Pacheco co-owners; hence the corporation and the co-owners should be deemed to be the same,
there being in substance and in effect an Identity of interest." (p. 254, Rollo)

The petitioners maintain that the Pachecos did not sell the property. They argue that there was no
sale and that they exchanged the land for shares of stocks in their own corporation. "Hence, such
transfer is not within the letter, or even spirit of the contract. There is a sale when ownership is
transferred for a price certain in money or its equivalent (Art. 1468, Civil Code) while there is a
barter or exchange when one thing is given in consideration of another thing (Art. 1638, Civil
Code)." (pp. 254-255, Rollo)

On the other hand, the private respondent argues that Delpher Trades Corporation is a corporate
entity separate and distinct from the Pachecos. Thus, it contends that it cannot be said that Delpher
Trades Corporation is the Pacheco's same alter ego or conduit; that petitioner Delfin Pacheco,
having treated Delpher Trades Corporation as such a separate and distinct corporate entity, is not a
party who may allege that this separate corporate existence should be disregarded. It maintains
that there was actual transfer of ownership interests over the leased property when the same was
transferred to Delpher Trades Corporation in exchange for the latter's shares of stock.

We rule for the petitioners.

After incorporation, one becomes a stockholder of a corporation by subscription or by purchasing


stock directly from the corporation or from individual owners thereof (Salmon, Dexter & Co. v.
Unson, 47 Phil, 649, citing Bole v. Fulton [1912], 233 Pa., 609). In the case at bar, in exchange for
their properties, the Pachecos acquired 2,500 original unissued no par value shares of stocks of the
Delpher Trades Corporation. Consequently, the Pachecos became stockholders of the corporation
by subscription "The essence of the stock subscription is an agreement to take and pay for original
unissued shares of a corporation, formed or to be formed." (Rohrlich 243, cited in Agbayani,
Commentaries and Jurisprudence on the Commercial Laws of the Philippines, Vol. III, 1980
Edition, p. 430) It is significant that the Pachecos took no par value shares in exchange for their
properties.

A no-par value share does not purport to represent any stated proportionate interest in the capital
stock measured by value, but only an aliquot part of the whole number of such shares of the
issuing corporation. The holder of no-par shares may see from the certificate itself that he is only
an aliquot sharer in the assets of the corporation. But this character of proportionate interest is not
hidden beneath a false appearance of a given sum in money, as in the case of par value shares. The
capital stock of a corporation issuing only no-par value shares is not set forth by a stated amount
of money, but instead is expressed to be divided into a stated number of shares, such as, 1,000
shares. This indicates that a shareholder of 100 such shares is an aliquot sharer in the assets of the
corporation, no matter what value they may have, to the extent of 100/1,000 or 1/10. Thus, by
removing the par value of shares, the attention of persons interested in the financial condition of a
corporation is focused upon the value of assets and the amount of its debts. (Agbayani,
Commentaries and Jurisprudence on the Commercial Laws of the Philippines, Vol. III, 1980
Edition, p. 107).

Moreover, there was no attempt to state the true or current market value of the real estate. Land
valued at P300.00 a square meter was turned over to the family's corporation for only P14.00 a
square meter.

It is to be stressed that by their ownership of the 2,500 no par shares of stock, the Pachecos have
control of the corporation. Their equity capital is 55% as against 45% of the other stockholders,
who also belong to the same family group.

In effect, the Delpher Trades Corporation is a business conduit of the Pachecos. What they really
did was to invest their properties and change the nature of their ownership from unincorporated to
incorporated form by organizing Delpher Trades Corporation to take control of their properties
and at the same time save on inheritance taxes.

As explained by Eduardo Neria:


xxx xxx xxx

ATTY. LINSANGAN:

Q Mr. Neria, from the point of view of taxation, is there any benefit to the spouses Hernandez and
Pacheco in connection with their execution of a deed of exchange on the properties for no par
value shares of the defendant corporation?

A Yes, sir.

COURT:

Q What do you mean by "point of view"?

A To take advantage for both spouses and corporation in entering in the deed of exchange.

ATTY. LINSANGAN:

Q (What do you mean by "point of view"?) What are these benefits to the spouses of this deed of
exchange?

A Continuous control of the property, tax exemption benefits, and other inherent benefits in a
corporation.

Q What are these advantages to the said spouses from the point of view of taxation in entering in
the deed of exchange?

A Having fulfilled the conditions in the income tax law, providing for tax free exchange of
property, they were able to execute the deed of exchange free from income tax and acquire a
corporation.

Q What provision in the income tax law are you referring to?

A I refer to Section 35 of the National Internal Revenue Code under par. C-sub-par. (2) Exceptions
regarding the provision which I quote: "No gain or loss shall also be recognized if a person
exchanges his property for stock in a corporation of which as a result of such exchange said
person alone or together with others not exceeding four persons gains control of said corporation."

Q Did you explain to the spouses this benefit at the time you executed the deed of exchange?

A Yes, sir

Q You also, testified during the last hearing that the decision to have no par value share in the
defendant corporation was for the purpose of flexibility. Can you explain flexibility in connection
with the ownership of the property in question?

A There is flexibility in using no par value shares as the value is determined by the board of
directors in increasing capitalization. The board can fix the value of the shares equivalent to the
capital requirements of the corporation.

Q Now also from the point of taxation, is there any flexibility in the holding by the corporation of
the property in question?

A Yes, since a corporation does not die it can continue to hold on to the property indefinitely for a
period of at least 50 years. On the other hand, if the property is held by the spouse the property
will be tied up in succession proceedings and the consequential payments of estate and inheritance
taxes when an owner dies.

Q Now what advantage is this continuity in relation to ownership by a particular person of certain
properties in respect to taxation?

A The property is not subjected to taxes on succession as the corporation does not die.

Q So the benefit you are talking about are inheritance taxes?

A Yes, sir. (pp. 3-5, tsn., December 15, 1981)

The records do not point to anything wrong or objectionable about this "estate planning" scheme
resorted to by the Pachecos. "The legal right of a taxpayer to decrease the amount of what
otherwise could be his taxes or altogether avoid them, by means which the law permits, cannot be
doubted." (Liddell & Co., Inc. v. The collector of Internal Revenue, 2 SCRA 632 citing Gregory v.
Helvering, 293 U.S. 465, 7 L. ed. 596).

The "Deed of Exchange" of property between the Pachecos and Delpher Trades Corporation
cannot be considered a contract of sale. There was no transfer of actual ownership interests by the
Pachecos to a third party. The Pacheco family merely changed their ownership from one form to
another. The ownership remained in the same hands. Hence, the private respondent has no basis
for its claim of a light of first refusal under the lease contract.

WHEREFORE, the instant petition is hereby GRANTED, The questioned decision and resolution
of the then Intermediate Appellate Court are REVERSED and SET ASIDE. The amended
complaint in Civil Case No. 885-V-79 of the then Court of First Instance of Bulacan is
DISMISSED. No costs.

SO ORDERED.

Fernan (Chairman), Bidin and Cortes, JJ., concur.


Feliciano, J., took no part.

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FIRST DIVISION

G.R. No. 119176 March 19, 2002

COMMISSIONER OF INTERNAL REVENUE, petitioner,


vs.
LINCOLN PHILIPPINE LIFE INSURANCE COMPANY, INC. (now JARDINE-CMA LIFE
INSURANCE COMPANY, INC.) and THE COURT OF APPEALS, respondents.

KAPUNAN, J.:
This is a petition for review on certiorari filed by the Commission on Internal Revenue of the
decision of the Court of Appeals dated November 18, 1994 in C.A. G.R. SP No. 31224 which
reversed in part the decision of the Court of Tax Appeals in C.T.A. Case No. 4583.

The facts of the case are undisputed.

Private respondent Lincoln Philippine Life Insurance Co., Inc., (now Jardine-CMA Life Insurance
Company, Inc.) is a domestic corporation registered with the Securities and Exchange
Commission and engaged in life insurance business. In the years prior to 1984, private respondent
issued a special kind of life insurance policy known as the "Junior Estate Builder Policy," the
distinguishing feature of which is a clause providing for an automatic increase in the amount of
life insurance coverage upon attainment of a certain age by the insured without the need of issuing
a new policy. The clause was to take effect in the year 1984. Documentary stamp taxes due on the
policy were paid by petitioner only on the initial sum assured.

In 1984, private respondent also issued 50,000 shares of stock dividends with a par value of
P100.00 per share or a total par value of P5,000,000.00. The actual value of said shares,
represented by its book value, was P19,307,500.00. Documentary stamp taxes were paid based
only on the par value of P5,000,000.00 and not on the book value.1âwphi1.nêt

Subsequently, petitioner issued deficiency documentary stamps tax assessment for the year 1984
in the amounts of (a) P464,898.75, corresponding to the amount of automatic increase of the sum
assured on the policy issued by respondent, and (b) P78,991.25 corresponding to the book value in
excess of the par value of the stock dividends. The computation of the deficiency documentary
stamp taxes is as follows:

On Policies Issued:

Total policy issued during the year

P1,360,054,000.00

Documentary stamp tax due thereon (P1,360,054,000.00 divided by P200.00 multiplied by P0.35)

P 2,380,094.50

Less: Payment

P 1,915,495.75

Deficiency
P 464,598.75

Add: Compromise Penalty

300.00

-----------------------

TOTAL AMOUNT DUE & COLLECTIBLE

P 464,898.75

Private respondent questioned the deficiency assessments and sought their cancellation in a
petition filed in the Court of Tax Appeals, docketed as CTA Case No. 4583.

On March 30, 1993, the Court of Tax Appeals found no valid basis for the deficiency tax
assessment on the stock dividends, as well as on the insurance policy. The dispositive portion of
the CTA’s decision reads:

WHEREFORE, the deficiency documentary stamp tax assessments in the amount of P464,898.76
and P78,991.25 or a total of P543,890.01 are hereby cancelled for lack of merit. Respondent
Commissioner of Internal Revenue is ordered to desist from collecting said deficiency
documentary stamp taxes for the same are considered withdrawn.

SO ORDERED.1

Petitioner appealed the CTA’s decision to the Court of Appeals. On November 18, 1994, the Court
of Appeals promulgated a decision affirming the CTA’s decision insofar as it nullified the
deficiency assessment on the insurance policy, but reversing the same with regard to the
deficiency assessment on the stock dividends. The CTA ruled that the correct basis of the
documentary stamp tax due on the stock dividends is the actual value or book value represented by
the shares. The dispositive portion of the Court of Appeals’ decision states:

IN VIEW OF ALL THE FOREGOING, the decision appealed from is hereby REVERSED with
respect to the deficiency tax assessment on the stock dividends, but AFFIRMED with regards to
the assessment on the Insurance Policies. Consequently, private respondent is ordered to pay the
petitioner herein the sum of P78,991.25, representing documentary stamp tax on the stock
dividends it issued. No costs pronouncement.

SO ORDERED.2

A motion for reconsideration of the decision having been denied,3 both the Commissioner of
Internal Revenue and private respondent appealed to this Court, docketed as G.R. No. 118043 and
G.R. No. 119176, respectively. In G.R. No. 118043, private respondent appealed the decision of
the Court of Appeals insofar as it upheld the validity of the deficiency tax assessment on the stock
dividends. The Commissioner of Internal Revenue, on his part, filed the present petition
questioning that portion of the Court of Appeals’ decision which invalidated the deficiency
assessment on the insurance policy, attributing the following errors:

THE HONORABLE COURT OF APPEALS ERRED WHEN IT RULED THAT THERE IS A


SINGLE AGREEMENT EMBODIED IN THE POLICY AND THAT THE AUTOMATIC
INCREASE CLAUSE IS NOT A SEPARATE AGREEMENT, CONTRARY TO SECTION 49 OF
THE INSURANCE CODE AND SECTION 183 OF THE REVENUE CODE THAT A RIDER, A
CLAUSE IS PART OF THE POLICY.

THE HONORABLE COURT OF APPEALS ERRED IN NOT COMPUTING THE AMOUNT


OF TAX ON THE TOTAL VALUE OF THE INSURANCE ASSURED IN THE POLICY
INCLUDING THE ADDITIONAL INCREASE ASSURED BY THE AUTOMATIC INCREASE
CLAUSE DESPITE ITS RULING THAT THE ORIGINAL POLICY AND THE AUTOMATIC
CLAUSE CONSTITUTED ONLY A SINGULAR TRANSACTION.4

Section 173 of the National Internal Revenue Code on documentary stamp taxes provides:

Sec. 173. Stamp taxes upon documents, instruments and papers. - Upon documents, instruments,
loan agreements, and papers, and upon acceptances, assignments, sales, and transfers of the
obligation, right or property incident thereto, there shall be levied, collected and paid for, and in
respect of the transaction so had or accomplished, the corresponding documentary stamp taxes
prescribed in the following section of this Title, by the person making, signing, issuing, accepting,
or transferring the same wherever the document is made, signed, issued, accepted, or transferred
when the obligation or right arises from Philippine sources or the property is situated in the
Philippines, and at the same time such act is done or transaction had: Provided, That whenever one
party to the taxable document enjoys exemption from the tax herein imposed, the other party
thereto who is not exempt shall be the one directly liable for the tax. (As amended by PD No.
1994) The basis for the value of documentary stamp taxes to be paid on the insurance policy is
Section 183 of the National Internal Revenue Code which states in part:

The basis for the value of documentary stamp taxes to be paid on the insurance policy is Section
183 of the National Internal Revenue Code which states in part:

Sec. 183. Stamp tax on life insurance policies. - On all policies of insurance or other instruments
by whatever name the same may be called, whereby any insurance shall be made or renewed upon
any life or lives, there shall be collected a documentary stamp tax of thirty (now 50c) centavos on
each Two hundred pesos per fractional part thereof, of the amount insured by any such policy.

Petitioner claims that the "automatic increase clause" in the subject insurance policy is separate
and distinct from the main agreement and involves another transaction; and that, while no new
policy was issued, the original policy was essentially re-issued when the additional obligation was
assumed upon the effectivity of this "automatic increase clause" in 1984; hence, a deficiency
assessment based on the additional insurance not covered in the main policy is in order.

The Court of Appeals sustained the CTA’s ruling that there was only one transaction involved in
the issuance of the insurance policy and that the "automatic increase clause" is an integral part of
that policy.

The petition is impressed with merit.

Section 49, Title VI of the Insurance Code defines an insurance policy as the written instrument in
which a contract of insurance is set forth.5 Section 50 of the same Code provides that the policy,
which is required to be in printed form, may contain any word, phrase, clause, mark, sign, symbol,
signature, number, or word necessary to complete the contract of insurance.6 It is thus clear that
any rider, clause, warranty or endorsement pasted or attached to the policy is considered part of
such policy or contract of insurance.

The subject insurance policy at the time it was issued contained an "automatic increase clause."
Although the clause was to take effect only in 1984, it was written into the policy at the time of its
issuance. The distinctive feature of the "junior estate builder policy" called the "automatic increase
clause" already formed part and parcel of the insurance contract, hence, there was no need for an
execution of a separate agreement for the increase in the coverage that took effect in 1984 when
the assured reached a certain age.

It is clear from Section 173 that the payment of documentary stamp taxes is done at the time the
act is done or transaction had and the tax base for the computation of documentary stamp taxes on
life insurance policies under Section 183 is the amount fixed in policy, unless the interest of a
person insured is susceptible of exact pecuniary measurement.7 What then is the amount fixed in
the policy? Logically, we believe that the amount fixed in the policy is the figure written on its
face and whatever increases will take effect in the future by reason of the "automatic increase
clause" embodied in the policy without the need of another contract.

Here, although the automatic increase in the amount of life insurance coverage was to take effect
later on, the date of its effectivity, as well as the amount of the increase, was already definite at the
time of the issuance of the policy. Thus, the amount insured by the policy at the time of its
issuance necessarily included the additional sum covered by the automatic increase clause because
it was already determinable at the time the transaction was entered into and formed part of the
policy.

The "automatic increase clause" in the policy is in the nature of a conditional obligation under
Article 1181,8 by which the increase of the insurance coverage shall depend upon the happening
of the event which constitutes the obligation. In the instant case, the additional insurance that took
effect in 1984 was an obligation subject to a suspensive obligation,9 but still a part of the
insurance sold to which private respondent was liable for the payment of the documentary stamp
tax.
The deficiency of documentary stamp tax imposed on private respondent is definitely not on the
amount of the original insurance coverage, but on the increase of the amount insured upon the
effectivity of the "Junior Estate Builder Policy."

Finally, it should be emphasized that while tax avoidance schemes and arrangements are not
prohibited,10 tax laws cannot be circumvented in order to evade the payment of just taxes. In the
case at bar, to claim that the increase in the amount insured (by virtue of the automatic increase
clause incorporated into the policy at the time of issuance) should not be included in the
computation of the documentary stamp taxes due on the policy would be a clear evasion of the law
requiring that the tax be computed on the basis of the amount insured by the policy.

WHEREFORE, the petition is hereby given DUE COURSE. The decision of the Court of Appeals
is SET ASIDE insofar as it affirmed the decision of the Court of Tax Appeals nullifying the
deficiency stamp tax assessment petitioner imposed on private respondent in the amount of
P464,898.75 corresponding to the increase in 1984 of the sum under the policy issued by
respondent.1âwphi1.nêt

SO ORDERED.

Davide, Jr., C.J. and Ynares-Santiago, J., concur.


Puno, J., on official leave.

Footnote

1 Court of Appeals (CA) Rollo. p. 16, Annex "B."

2 Rollo, p. 47.

3 CA Rollo, p. 218.

4 Rollo, p. 19.

5 SEC. 49. The written instrument in which a contract of insurance is set forth, is called a policy
of insurance.

6 SEC. 50. The policy shall be in printed form which may contain blank spaces; and any word,
phrase, clause, mark, sign, symbol, signature, number, or word necessary to complete the contract
of insurance shall be written on the blank spaces provided therein.

Any rider, clause, warranty or endorsement purporting to be part of the contract of insurance and
which is pasted or attached to said policy is not binding on the insured, unless the descriptive title
or name of the rider, clause, warranty, or endorsement is also mentioned and written on the blank
spaces provided in the policy.
Unless applied for by the insured or owner, any rider, clause, warranty or endorsement issued after
the original policy shall be countersigned by the insured or owner, which counter-signature shall
be taken as his agreement to the contents of such rider, clause, warranty or endorsement.

Group insurance and group annuity policies, however, may be typewritten and need not be in
printed form.

7 Sec. 183. Insurance Code of the Phils. – Unless the interest of a person insured is capable of
exact pecuniary measurement, the measure of indemnity under a policy of insurance upon life or
health is the sum fixed in the policy.

8 Art. 1181. In conditional obligations, the acquisition of rights, as well as the extinguishment or
loss of those already acquired, shall depend upon the happening of the event which constitutes the
condition.

9 Article 18 of the Civil Code provides that "on matters which are governed by the Code of
Commerce and special laws, their deficiency shall be supplied by the provision of this Code."

10 Delpher Trades Corporation vs. Intermediate Appellate Court, 157 SCRA 349 (1988).

The Lawphil Project - Arellano Law Foundation


FIRST DIVISION
[G.R. No. 147188. September 14, 2004]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE ESTATE OF BENIGNO P.


TODA, JR., Represented by Special Co-administrators Lorna Kapunan and Mario Luza Bautista,
respondents.
DECISION
DAVIDE, JR., C.J.:

This Court is called upon to determine in this case whether the tax planning scheme adopted by a
corporation constitutes tax evasion that would justify an assessment of deficiency income tax.
The petitioner seeks the reversal of the Decision[1] of the Court of Appeals of 31 January 2001 in
CA-G.R. SP No. 57799 affirming the 3 January 2000 Decision[2] of the Court of Tax Appeals
(CTA) in C.T.A. Case No. 5328,[3] which held that the respondent Estate of Benigno P. Toda, Jr.
is not liable for the deficiency income tax of Cibeles Insurance Corporation (CIC) in the amount
of P79,099,999.22 for the year 1989, and ordered the cancellation and setting aside of the
assessment issued by Commissioner of Internal Revenue Liwayway Vinzons-Chato on 9 January
1995.
The case at bar stemmed from a Notice of Assessment sent to CIC by the Commissioner of
Internal Revenue for deficiency income tax arising from an alleged simulated sale of a 16-storey
commercial building known as Cibeles Building, situated on two parcels of land on Ayala Avenue,
Makati City.
On 2 March 1989, CIC authorized Benigno P. Toda, Jr., President and owner of 99.991% of its
issued and outstanding capital stock, to sell the Cibeles Building and the two parcels of land on
which the building stands for an amount of not less than P90 million.[4]
On 30 August 1989, Toda purportedly sold the property for P100 million to Rafael A. Altonaga,
who, in turn, sold the same property on the same day to Royal Match Inc. (RMI) for P200 million.
These two transactions were evidenced by Deeds of Absolute Sale notarized on the same day by
the same notary public.[5]
For the sale of the property to RMI, Altonaga paid capital gains tax in the amount of P10 million.
[6]
On 16 April 1990, CIC filed its corporate annual income tax return[7] for the year 1989, declaring,
among other things, its gain from the sale of real property in the amount of P75,728.021. After
crediting withholding taxes of P254,497.00, it paid P26,341,207[8] for its net taxable income of
P75,987,725.
On 12 July 1990, Toda sold his entire shares of stocks in CIC to Le Hun T. Choa for P12.5 million,
as evidenced by a Deed of Sale of Shares of Stocks.[9] Three and a half years later, or on 16
January 1994, Toda died.
On 29 March 1994, the Bureau of Internal Revenue (BIR) sent an assessment notice[10] and
demand letter to the CIC for deficiency income tax for the year 1989 in the amount of
P79,099,999.22.
The new CIC asked for a reconsideration, asserting that the assessment should be directed against
the old CIC, and not against the new CIC, which is owned by an entirely different set of
stockholders; moreover, Toda had undertaken to hold the buyer of his stockholdings and the CIC
free from all tax liabilities for the fiscal years 1987-1989.[11]
On 27 January 1995, the Estate of Benigno P. Toda, Jr., represented by special co-administrators
Lorna Kapunan and Mario Luza Bautista, received a Notice of Assessment[12] dated 9 January
1995 from the Commissioner of Internal Revenue for deficiency income tax for the year 1989 in
the amount of P79,099,999.22, computed as follows:
Income Tax 1989

Net Income per return P75,987,725.00


Add: Additional gain on sale
of real property taxable under
ordinary corporate income
but were substituted with
individual capital gains
(P200M 100M) 100,000,000.00
Total Net Taxable Income P175,987,725.00
per investigation

Tax Due thereof at 35% P 61,595,703.75

Less: Payment already made

1. Per return P26,595,704.00


2. Thru Capital Gains
Tax made by R.A.
Altonaga 10,000,000.00 36,595,704.00
Balance of tax due P 24,999,999.75
Add: 50% Surcharge 12,499,999.88
25% Surcharge 6,249,999.94
Total P 43,749,999.57
Add: Interest 20% from
4/16/90-4/30/94 (.808) 35,349,999.65
TOTAL AMT. DUE & COLLECTIBLE P 79,099,999.22
============
The Estate thereafter filed a letter of protest.[13]
In the letter dated 19 October 1995,[14] the Commissioner dismissed the protest, stating that a
fraudulent scheme was deliberately perpetuated by the CIC wholly owned and controlled by Toda
by covering up the additional gain of P100 million, which resulted in the change in the income
structure of the proceeds of the sale of the two parcels of land and the building thereon to an
individual capital gains, thus evading the higher corporate income tax rate of 35%.
On 15 February 1996, the Estate filed a petition for review[15] with the CTA alleging that the
Commissioner erred in holding the Estate liable for income tax deficiency; that the inference of
fraud of the sale of the properties is unreasonable and unsupported; and that the right of the
Commissioner to assess CIC had already prescribed.
In his Answer[16] and Amended Answer,[17] the Commissioner argued that the two transactions
actually constituted a single sale of the property by CIC to RMI, and that Altonaga was neither the
buyer of the property from CIC nor the seller of the same property to RMI. The additional gain of
P100 million (the difference between the second simulated sale for P200 million and the first
simulated sale for P100 million) realized by CIC was taxed at the rate of only 5% purportedly as
capital gains tax of Altonaga, instead of at the rate of 35% as corporate income tax of CIC. The
income tax return filed by CIC for 1989 with intent to evade payment of the tax was thus false or
fraudulent. Since such falsity or fraud was discovered by the BIR only on 8 March 1991, the
assessment issued on 9 January 1995 was well within the prescriptive period prescribed by Section
223 (a) of the National Internal Revenue Code of 1986, which provides that tax may be assessed
within ten years from the discovery of the falsity or fraud. With the sale being tainted with fraud,
the separate corporate personality of CIC should be disregarded. Toda, being the registered owner
of the 99.991% shares of stock of CIC and the beneficial owner of the remaining 0.009% shares
registered in the name of the individual directors of CIC, should be held liable for the deficiency
income tax, especially because the gains realized from the sale were withdrawn by him as cash
advances or paid to him as cash dividends. Since he is already dead, his estate shall answer for his
liability.
In its decision[18] of 3 January 2000, the CTA held that the Commissioner failed to prove that
CIC committed fraud to deprive the government of the taxes due it. It ruled that even assuming
that a pre-conceived scheme was adopted by CIC, the same constituted mere tax avoidance, and
not tax evasion. There being no proof of fraudulent transaction, the applicable period for the BIR
to assess CIC is that prescribed in Section 203 of the NIRC of 1986, which is three years after the
last day prescribed by law for the filing of the return. Thus, the governments right to assess CIC
prescribed on 15 April 1993. The assessment issued on 9 January 1995 was, therefore, no longer
valid. The CTA also ruled that the mere ownership by Toda of 99.991% of the capital stock of CIC
was not in itself sufficient ground for piercing the separate corporate personality of CIC. Hence,
the CTA declared that the Estate is not liable for deficiency income tax of P79,099,999.22 and,
accordingly, cancelled and set aside the assessment issued by the Commissioner on 9 January
1995.
In its motion for reconsideration,[19] the Commissioner insisted that the sale of the property
owned by CIC was the result of the connivance between Toda and Altonaga. She further alleged
that the latter was a representative, dummy, and a close business associate of the former, having
held his office in a property owned by CIC and derived his salary from a foreign corporation
(Aerobin, Inc.) duly owned by Toda for representation services rendered. The CTA denied[20] the
motion for reconsideration, prompting the Commissioner to file a petition for review[21] with the
Court of Appeals.
In its challenged Decision of 31 January 2001, the Court of Appeals affirmed the decision of the
CTA, reasoning that the CTA, being more advantageously situated and having the necessary
expertise in matters of taxation, is better situated to determine the correctness, propriety, and
legality of the income tax assessments assailed by the Toda Estate.[22]
Unsatisfied with the decision of the Court of Appeals, the Commissioner filed the present petition
invoking the following grounds:
I. THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT COMMITTED NO
FRAUD WITH INTENT TO EVADE THE TAX ON THE SALE OF THE PROPERTIES OF
CIBELES INSURANCE CORPORATION.
II. THE COURT OF APPEALS ERRED IN NOT DISREGARDING THE SEPARATE
CORPORATE PERSONALITY OF CIBELES INSURANCE CORPORATION.
III. THE COURT OF APPEALS ERRED IN HOLDING THAT THE RIGHT OF PETITIONER
TO ASSESS RESPONDENT FOR DEFICIENCY INCOME TAX FOR THE YEAR 1989 HAD
PRESCRIBED.
The Commissioner reiterates her arguments in her previous pleadings and insists that the sale by
CIC of the Cibeles property was in connivance with its dummy Rafael Altonaga, who was
financially incapable of purchasing it. She further points out that the documents themselves prove
the fact of fraud in that (1) the two sales were done simultaneously on the same date, 30 August
1989; (2) the Deed of Absolute Sale between Altonaga and RMI was notarized ahead of the
alleged sale between CIC and Altonaga, with the former registered in the Notarial Register of
Jocelyn H. Arreza Pabelana as Doc. 91, Page 20, Book I, Series of 1989; and the latter, as Doc.
No. 92, Page 20, Book I, Series of 1989, of the same Notary Public; (3) as early as 4 May 1989,
CIC received P40 million from RMI, and not from Altonaga. The said amount was debited by
RMI in its trial balance as of 30 June 1989 as investment in Cibeles Building. The substantial
portion of P40 million was withdrawn by Toda through the declaration of cash dividends to all its
stockholders.
For its part, respondent Estate asserts that the Commissioner failed to present the income tax
return of Altonaga to prove that the latter is financially incapable of purchasing the Cibeles
property.
To resolve the grounds raised by the Commissioner, the following questions are pertinent:
1. Is this a case of tax evasion or tax avoidance?

2. Has the period for assessment of deficiency income tax for the year 1989 prescribed? and

3. Can respondent Estate be held liable for the deficiency income tax of CIC for the year 1989, if
any?

We shall discuss these questions in seriatim.


Is this a case of tax evasion
or tax avoidance?

Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping
from taxation. Tax avoidance is the tax saving device within the means sanctioned by law. This
method should be used by the taxpayer in good faith and at arms length. Tax evasion, on the other
hand, is a scheme used outside of those lawful means and when availed of, it usually subjects the
taxpayer to further or additional civil or criminal liabilities.[23]
Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment
of less than that known by the taxpayer to be legally due, or the non-payment of tax when it is
shown that a tax is due; (2) an accompanying state of mind which is described as being evil, in bad
faith, willfull,or deliberate and not accidental; and (3) a course of action or failure of action which
is unlawful.[24]
All these factors are present in the instant case. It is significant to note that as early as 4 May 1989,
prior to the purported sale of the Cibeles property by CIC to Altonaga on 30 August 1989, CIC
received P40 million from RMI,[25] and not from Altonaga. That P40 million was debited by RMI
and reflected in its trial balance[26] as other inv. Cibeles Bldg. Also, as of 31 July 1989, another
P40 million was debited and reflected in RMIs trial balance as other inv. Cibeles Bldg. This would
show that the real buyer of the properties was RMI, and not the intermediary Altonaga.
The investigation conducted by the BIR disclosed that Altonaga was a close business associate and
one of the many trusted corporate executives of Toda. This information was revealed by Mr. Boy
Prieto, the assistant accountant of CIC and an old timer in the company. [27] But Mr. Prieto did
not testify on this matter, hence, that information remains to be hearsay and is thus inadmissible in
evidence. It was not verified either, since the letter-request for investigation of Altonaga was
unserved,[28] Altonaga having left for the United States of America in January 1990.
Nevertheless, that Altonaga was a mere conduit finds support in the admission of respondent
Estate that the sale to him was part of the tax planning scheme of CIC. That admission is borne by
the records. In its Memorandum, respondent Estate declared:
Petitioner, however, claims there was a change of structure of the proceeds of sale. Admitted one
hundred percent. But isnt this precisely the definition of tax planning? Change the structure of the
funds and pay a lower tax. Precisely, Sec. 40 (2) of the Tax Code exists, allowing tax free transfers
of property for stock, changing the structure of the property and the tax to be paid. As long as it is
done legally, changing the structure of a transaction to achieve a lower tax is not against the law. It
is absolutely allowed.

Tax planning is by definition to reduce, if not eliminate altogether, a tax. Surely petitioner [sic]
cannot be faulted for wanting to reduce the tax from 35% to 5%.[29] [Underscoring supplied].

The scheme resorted to by CIC in making it appear that there were two sales of the subject
properties, i.e., from CIC to Altonaga, and then from Altonaga to RMI cannot be considered a
legitimate tax planning. Such scheme is tainted with fraud.
Fraud in its general sense, is deemed to comprise anything calculated to deceive, including all
acts, omissions, and concealment involving a breach of legal or equitable duty, trust or confidence
justly reposed, resulting in the damage to another, or by which an undue and unconscionable
advantage is taken of another.[30]
Here, it is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to be
paid especially that the transfer from him to RMI would then subject the income to only 5%
individual capital gains tax, and not the 35% corporate income tax. Altonagas sole purpose of
acquiring and transferring title of the subject properties on the same day was to create a tax shelter.
Altonaga never controlled the property and did not enjoy the normal benefits and burdens of
ownership. The sale to him was merely a tax ploy, a sham, and without business purpose and
economic substance. Doubtless, the execution of the two sales was calculated to mislead the BIR
with the end in view of reducing the consequent income tax liability.
In a nutshell, the intermediary transaction, i.e., the sale of Altonaga, which was prompted more on
the mitigation of tax liabilities than for legitimate business purposes constitutes one of tax evasion.
[31]
Generally, a sale or exchange of assets will have an income tax incidence only when it is
consummated.[32] The incidence of taxation depends upon the substance of a transaction. The tax
consequences arising from gains from a sale of property are not finally to be determined solely by
the means employed to transfer legal title. Rather, the transaction must be viewed as a whole, and
each step from the commencement of negotiations to the consummation of the sale is relevant. A
sale by one person cannot be transformed for tax purposes into a sale by another by using the latter
as a conduit through which to pass title. To permit the true nature of the transaction to be disguised
by mere formalisms, which exist solely to alter tax liabilities, would seriously impair the effective
administration of the tax policies of Congress.[33]
To allow a taxpayer to deny tax liability on the ground that the sale was made through another and
distinct entity when it is proved that the latter was merely a conduit is to sanction a circumvention
of our tax laws. Hence, the sale to Altonaga should be disregarded for income tax purposes.[34]
The two sale transactions should be treated as a single direct sale by CIC to RMI.
Accordingly, the tax liability of CIC is governed by then Section 24 of the NIRC of 1986, as
amended (now 27 (A) of the Tax Reform Act of 1997), which stated as follows:
Sec. 24. Rates of tax on corporations. (a) Tax on domestic corporations.- A tax is hereby imposed
upon the taxable net income received during each taxable year from all sources by every
corporation organized in, or existing under the laws of the Philippines, and partnerships, no matter
how created or organized but not including general professional partnerships, in accordance with
the following:

Twenty-five percent upon the amount by which the taxable net income does not exceed one
hundred thousand pesos; and

Thirty-five percent upon the amount by which the taxable net income exceeds one hundred
thousand pesos.

CIC is therefore liable to pay a 35% corporate tax for its taxable net income in 1989. The 5%
individual capital gains tax provided for in Section 34 (h) of the NIRC of 1986[35] (now 6%
under Section 24 (D) (1) of the Tax Reform Act of 1997) is inapplicable. Hence, the assessment
for the deficiency income tax issued by the BIR must be upheld.
Has the period of
assessment prescribed?

No. Section 269 of the NIRC of 1986 (now Section 222 of the Tax Reform Act of 1997) read:
Sec. 269. Exceptions as to period of limitation of assessment and collection of taxes.-(a) In the
case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may
be assessed, or a proceeding in court after the collection of such tax may be begun without
assessment, at any time within ten years after the discovery of the falsity, fraud or omission:
Provided, That in a fraud assessment which has become final and executory, the fact of fraud shall
be judicially taken cognizance of in the civil or criminal action for collection thereof .

Put differently, in cases of (1) fraudulent returns; (2) false returns with intent to evade tax; and (3)
failure to file a return, the period within which to assess tax is ten years from discovery of the
fraud, falsification or omission, as the case may be.
It is true that in a query dated 24 August 1989, Altonaga, through his counsel, asked the Opinion
of the BIR on the tax consequence of the two sale transactions.[36] Thus, the BIR was amply
informed of the transactions even prior to the execution of the necessary documents to effect the
transfer. Subsequently, the two sales were openly made with the execution of public documents
and the declaration of taxes for 1989. However, these circumstances do not negate the existence of
fraud. As earlier discussed those two transactions were tainted with fraud. And even assuming
arguendo that there was no fraud, we find that the income tax return filed by CIC for the year 1989
was false. It did not reflect the true or actual amount gained from the sale of the Cibeles property.
Obviously, such was done with intent to evade or reduce tax liability.
As stated above, the prescriptive period to assess the correct taxes in case of false returns is ten
years from the discovery of the falsity. The false return was filed on 15 April 1990, and the falsity
thereof was claimed to have been discovered only on 8 March 1991.[37] The assessment for the
1989 deficiency income tax of CIC was issued on 9 January 1995. Clearly, the issuance of the
correct assessment for deficiency income tax was well within the prescriptive period.
Is respondent Estate liable
for the 1989 deficiency
income tax of Cibeles
Insurance Corporation?

A corporation has a juridical personality distinct and separate from the persons owning or
composing it. Thus, the owners or stockholders of a corporation may not generally be made to
answer for the liabilities of a corporation and vice versa. There are, however, certain instances in
which personal liability may arise. It has been held in a number of cases that personal liability of a
corporate director, trustee, or officer along, albeit not necessarily, with the corporation may validly
attach when:
1. He assents to the (a) patently unlawful act of the corporation, (b) bad faith or gross negligence
in directing its affairs, or (c) conflict of interest, resulting in damages to the corporation, its
stockholders, or other persons;
2. He consents to the issuance of watered down stocks or, having knowledge thereof, does not
forthwith file with the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation; or
4. He is made, by specific provision of law, to personally answer for his corporate action.[38]
It is worth noting that when the late Toda sold his shares of stock to Le Hun T. Choa, he
knowingly and voluntarily held himself personally liable for all the tax liabilities of CIC and the
buyer for the years 1987, 1988, and 1989. Paragraph g of the Deed of Sale of Shares of Stocks
specifically provides:
g. Except for transactions occurring in the ordinary course of business, Cibeles has no liabilities or
obligations, contingent or otherwise, for taxes, sums of money or insurance claims other than
those reported in its audited financial statement as of December 31, 1989, attached hereto as
Annex B and made a part hereof. The business of Cibeles has at all times been conducted in full
compliance with all applicable laws, rules and regulations. SELLER undertakes and agrees to hold
the BUYER and Cibeles free from any and all income tax liabilities of Cibeles for the fiscal years
1987, 1988 and 1989.[39] [Underscoring Supplied].

When the late Toda undertook and agreed to hold the BUYER and Cibeles free from any all
income tax liabilities of Cibeles for the fiscal years 1987, 1988, and 1989, he thereby voluntarily
held himself personally liable therefor. Respondent estate cannot, therefore, deny liability for CICs
deficiency income tax for the year 1989 by invoking the separate corporate personality of CIC,
since its obligation arose from Todas contractual undertaking, as contained in the Deed of Sale of
Shares of Stock.
WHEREFORE, in view of all the foregoing, the petition is hereby GRANTED. The decision of
the Court of Appeals of 31 January 2001 in CA-G.R. SP No. 57799 is REVERSED and SET
ASIDE, and another one is hereby rendered ordering respondent Estate of Benigno P. Toda Jr. to
pay P79,099,999.22 as deficiency income tax of Cibeles Insurance Corporation for the year 1989,
plus legal interest from 1 May 1994 until the amount is fully paid.
Costs against respondent.
SO ORDERED.
Quisumbing, Ynares-Santiago, Carpio, and Azcuna, JJ., concur.

[1] Rollo, 22-31. Per Associate Justice Rodrigo V. Cosico, with Associate Justices Ramon A.
Barcelona and Alicia J. Santos concurring.
[2] Id., 32-41; CTA Records, 524-533. Per Presiding Judge Ernesto D. Acosta, with Associate
Judges Ramon O. De Veyra and Amancio Q. Saga concurring.
[3] Entitled The Estate of Benigno P. Toda, Jr., represented by Special Co-Administrators Lorna
Patajo-Kapunan and Mario Luza Bautista versus Commissioner of Internal Revenue.
[4] CA Rollo, 73.
[5] CA Rollo, 74-78; 88-92.
[6] Exh. E, CTA Records, 306.
[7] Exh. L, CTA Records, 340.
[8] Exh. M, M-1, N and N-1, CTA Records, 316-317.
[9] Exh. P, CTA Records, 357-365.
[10] BIR Records, 448-449.
[11] Id., 446-447.
[12] Id., 474-475.
[13] Exh. H, CTA Records, 314-315.
[14] Exh. G, CTA Records, 311-312.
[15] CTA Records, 1-15.
[16] CTA Records, 104-111.
[17] Id., 121-128.
[18] CTA Records 535-540.
[19] Id., 534, 539.
[20] Id., 550; CA Rollo, 32.
[21] CA Rollo, 7-20.
[22] Rollo, 30.
[23] Jose C. Vitug and Ernesto D. Acosta, Tax Law and Jurisprudence 44 (2nd ed., 2000)
(hereafter Vitug).
[24] DE LEON, FUNDAMENTALS OF TAXATION 53 (1988 ed.), citing Batter, Fraud under
Federal Tax Law 15 (1953 ed.).
[25] Exh. 3, CTA Records, 476.
[26] Exh. 6, CTA Records, 470.
[27] Exh. 1, CTA Records, 461.
[28] CTA Records, 466.
[29] Respondents Memorandum, 4-5; Rollo, 78-79.
[30] Commissioner of Internal Revenue v. Court of Appeals, 327 Phil. 1, 33 (1996).
[31] See Commissioner of Internal Revenue v. Norton Harrison Co., 120 Phil. 684, 691 (1964);
Commissioner of Internal Revenue v. Rufino, G.R. No. L-33665-68, 27 February 1987, 148 SCRA
42.
[32] VITUG, 138.
[33] Commissioner v. Court Holding Co., 324 U.S. 334 (1945).
[34] See Gregory v. Helvering, 293 U.S. 465 (1935); Frank Lyon Co. v. United States, 435 U.S.
561 (1978); Commissioner of Internal Revenue v. Court of Appeals, 361 Phil. 103, 126 (1999)
citing Asmussen v. CIR, 36 B.T.A. (F) 878; See also Neff v. U.S., 301 F2d 330; Cohen v. U.S.,
192 F Supp 216; Herman v. Comm., 283 F2d 227; Kessner v. Comm., 248 F2d 943; Comm. V.
Pope, 239 F2d 881; U.S. v. Fewel, 255 F2d 396.
[35] Sec. 34. Capital gains and loses.
...
(h) The provisions of paragraph (b) of this section to the contrary notwithstanding, sales,
exchanges or other dispositions of real property classified as capital assets, including pacto-de-
retro sales and other forms of conditional sale, by individuals, including estates and trusts, shall be
taxed at the rate of 5% based on the gross selling price or the fair market value prevailing at the
time of sale, whichever is higher.
[36] Exh. A, CTA Records, 296.
[37] Exh. 2, CTA Records, 464.
[38] Atrium Management Corporation v. Court of Appeals, G.R. Nos. 109491 and 121794, 28
February 2001, 353 SCRA 23, 31, citing FCY Construction Group Inc. v. Court of Appeals, G.R.
No. 123358, 1 February 2000, 324 SCRA 270.
[39] CTA Records, 200-201.
SECOND DIVISION

The CITY OF ILOILO, Mr. ROMEO V. MANIKAN, in his capacity as the Treasurer of Iloilo
City,
Petitioners,

- versus -
SMART COMMUNICATIONS, INC. (SMART),
Respondent.
G.R. No. 167260

Present:

QUISUMBING, J., Chairperson,


CARPIO MORALES,
VELASCO, JR.,
NACHURA,* and
BRION, JJ.

Promulgated:

February 27, 2009

x -------------------------------------------------------------------------------------------x

DECISION

BRION, J.:
Before this Court is the appeal by certiorari filed by the City of Iloilo (petitioner) under Rule 45 of
the Rules of Court seeking to set aside the decision of the Regional Trial Court (RTC) of Iloilo
City, Branch 28, which declared that respondent SMART Communications, Inc. (SMART) is
exempt from the payment of local franchise and business taxes.

BACKGROUND FACTS

The facts of the case are not in dispute. SMART received a letter of assessment dated February 12,
2002 from petitioner requiring it to pay deficiency local franchise and business taxes (in the
amount of P764,545.29, plus interests and surcharges) which it incurred for the years 1997 to
2001. SMART protested the assessment by sending a letter dated February 15, 2002 to the City
Treasurer. It claimed exemption from payment of local franchise and business taxes based on
Section 9 of its legislative franchise under Republic Act (R.A.) No. 7294 (SMARTs franchise).
Under SMARTs franchise, it was required to pay a franchise tax equivalent to 3% of all gross
receipts, which amount shall be in lieu of all taxes. SMART contends that the in lieu of all taxes
clause covers local franchise and business taxes.

SMART similarly invoked R.A. No. 7925 or the Public Telecommunications Policy Act (Public
Telecoms Act) whose Section 23 declares that any existing privilege, incentive, advantage, or
exemption granted under existing franchises shall ipso facto become part of previously granted-
telecommunications franchise. SMART contends that by virtue of Section 23, tax exemptions
granted by the legislature to other holders of telecommunications franchise may be extended to
and availed of by SMART.

Through a letter dated April 4, 2002, petitioner denied SMARTs protest, citing the failure of
SMART to comply with Section 252 of R.A. No. 7160 or the Local Government Code (LGC)
before filing the protest against the assessment. Section 252 of the LGC requires payment of the
tax before any protest against the tax assessment can be made.

SMART objected to the petitioners denial of its protest by instituting a case against petitioner
before the RTC of Iloilo City.[1] The trial court ruled in favour of SMART and declared the
telecommunications firm exempt from the payment of local franchise and business taxes;[2] it
agreed with SMARTs claim of exemption under Section 9 of its franchise and Section 23 of the
Public Telecoms Act.[3]
From this judgment, petitioner files this petition for review on certiorari raising the sole issue of
whether SMART is exempt from the payment of local franchise and business taxes.

THE COURTS RULING

SMART relies on two provisions of law to support its claim for tax exemption: Section 9 of
SMARTs franchise and Section 23 of the Public Telecoms Act. After a review of pertinent laws
and jurisprudence particularly of SMART Communications, Inc. v. City of Davao,[4] a case
which, except for the respondent, involves the same set of facts and issues we find SMARTs claim
for exemption to be unfounded. Consequently, we find the petition meritorious.

The basic principle in the construction of laws granting tax exemptions has been very stable. As
early as 1916, in the case of Government of the Philippine Islands v. Monte de Piedad,[5] this
Court has declared that he who claims an exemption from his share of the common burden of
taxation must justify his claim by showing that the Legislature intended to exempt him by words
too plain to be beyond doubt or mistake. This doctrine was repeated in the 1926 case of Asiatic
Petroleum v. Llanes,[6] as well as in the case of Borja v. Commissioner of Internal Revenue (CIR)
[7] decided in 1961. Citing American jurisprudence, the Court stated in E. Rodriguez, Inc. v. CIR:
[8]

The right of taxation is inherent in the State. It is a prerogative essential to the perpetuity of the
government; and he who claims an exemption from the common burden, must justify his claim by
the clearest grant of organic or statute law xxx When exemption is claimed, it must be shown
indubitably to exist. At the outset, every presumption is against it. A well-founded doubt is fatal to
the claim; it is only when the terms of the concession are too explicit to admit fairly of any other
construction that the proposition can be supported.

In the recent case of Digital Telecommunications, Inc. v. City Government of Batangas, et al.,[9]
we adhered to the same principle when we said:

A tax exemption cannot arise from vague inference...Tax exemptions must be clear and
unequivocal. A taxpayer claiming a tax exemption must point to a specific provision of law
conferring on the taxpayer, in clear and plain terms, exemption from a common burden. Any doubt
whether a tax exemption exists is resolved against the taxpayer.

The burden therefore is on SMART to prove that, based on its franchise and the Public Telecoms
Act, it is entitled to exemption from the local franchise and business taxes being collected by the
petitioner.

Claim for Exemption under


SMARTs franchise

Section 9 of SMARTs franchise states:

Section 9. Tax provisions. The grantee, its successors or assigns shall be liable to pay the same
taxes on their real estate buildings and personal property, exclusive of' this franchise, as other
persons or corporations which are now or hereafter may be required by law to pay. In addition
thereto, the grantee, its successors or assigns shall pay a franchise tax equivalent to three percent
(3%) of all gross receipts of the business transacted under this franchise by the grantee, its
successors or assigns and the said percentage shall be in lieu of all taxes on this franchise or
earnings thereof: Provided, That the grantee, its successors or assigns shall continue to be liable
for income taxes payable under Title II of the National Internal Revenue Code pursuant to Section
2 of Executive Order No. 72 unless the latter enactment is amended or repealed, in which case the
amendment or repeal shall be applicable thereto.

The grantee shall file the return with and pay the tax due thereon to the Commissioner of Internal
Revenue or his duly authorized representative in accordance with the National Internal Revenue
Code and the return shall be subject to audit by the Bureau of Internal Revenue. [Emphasis
supplied.]

The petitioner posits that SMARTs claim for exemption under its franchise is not equivocal
enough to prevail over the specific grant of power to local government units to exact taxes from
businesses operating within its territorial jurisdiction under Section 137 in relation to Section 151
of the LGC. More importantly, it claimed that exemptions from taxation have already been
removed by Section 193 of the LGC:

Section 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this Code,
tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or
juridical, including government-owned or controlled corporations, except local water districts,
cooperatives duly registered under RA No. 6938, non-stock and non-profit hospitals and
educational institutions, are hereby withdrawn upon the effectivity of this Code. [Emphasis
supplied.]

The petitioner argues, too, that SMARTs claim for exemption from taxes under Section 9 of its
franchise is not couched in plain and unequivocal language such that it restored the withdrawal of
tax exemptions under Section 193 above. It claims that if Congress intended that the tax
exemption privileges withdrawn by Section 193 of RA 7160 [LGC] were to be restored in
respondents [SMARTs] franchise, it would have so expressly provided therein and not merely
[restored the exemption] by the simple expedient of including the in lieu of all taxes provision in
said franchise.[10]
We have indeed ruled that by virtue of Section 193 of the LGC, all tax exemption privileges then
enjoyed by all persons, save those expressly mentioned, have been withdrawn effective January 1,
1992 the date of effectivity of the LGC.[11] The first clause of Section 137 of the LGC states the
same rule.[12] However, the withdrawal of exemptions, whether under Section 193 or 137 of the
LGC, pertains only to those already existing when the LGC was enacted. The intention of the
legislature was to remove all tax exemptions or incentives granted prior to the LGC.[13] As
SMARTs franchise was made effective on March 27, 1992 after the effectivity of the LGC Section
193 will therefore not apply in this case.

But while Section 193 of the LGC will not affect the claimed tax exemption under SMARTs
franchise, we fail to find a categorical and encompassing grant of tax exemption to SMART
covering exemption from both national and local taxes:

R.A. No 7294 does not expressly provide what kind of taxes SMART is exempted from. It is not
clear whether the in lieu of all taxes provision in the franchise of SMART would include
exemption from local or national taxation. What is clear is that SMART shall pay franchise tax
equivalent to three percent (3%) of all gross receipts of the business transacted under its franchise.
But whether the franchise tax exemption would include exemption from exactions by both the
local and the national government is not unequivocal.
The uncertainty in the in lieu of all taxes clause in R.A. No. 7294 on whether SMART is exempted
from both local and national franchise tax must be construed strictly against SMART which claims
the exemption. [Emphasis supplied.][14]

Justice Carpio, in his Separate Opinion in PLDT v. City of Davao,[15] explains why:

The proviso in the first paragraph of Section 9 of Smarts franchise states that the grantee shall
continue to be liable for income taxes payable under Title II of the National Internal Revenue
Code. Also, the second paragraph of Section 9 speaks of tax returns filed and taxes paid to the
Commissioner of Internal Revenue or his duly authorized representative in accordance with the
National Internal Revenue Code. Moreover, the same paragraph declares that the tax returns shall
be subject to audit by the Bureau of Internal Revenue. Nothing is mentioned in Section 9 about
local taxes. The clear intent is for the in lieu of all taxes clause to apply only to taxes under the
National Internal Revenue Code and not to local taxes.

Nonetheless, even if Section 9 of SMARTs franchise can be construed as covering local taxes as
well, reliance thereon would now be unavailing. The in lieu of all taxes clause basically exempts
SMART from paying all other kinds of taxes for as long as it pays the 3% franchise tax; it is the
franchise tax that shall be in lieu of all taxes, and not any other form of tax.[16] Franchise taxes on
telecommunications companies, however, have been abolished by R.A. No. 7716 or the Expanded
Value-Added Tax Law (E-VAT Law), which was enacted by Congress on January 1, 1996.[17] To
replace the franchise tax, the E-VAT Law imposed a 10%[18] value-added tax on
telecommunications companies under Section 108 of the National Internal Revenue Code.[19] The
in lieu of all taxes clause in the legislative franchise of SMART has thus become functus officio,
made inoperative for lack of a franchise tax.[20]

SMARTs claim for exemption from local business and franchise taxes based on Section 9 of its
franchise is therefore unfounded.

Claim for Exemption


Under Public Telecoms Act

SMART additionally invokes the equality clause under Section 23

of the Public Telecoms Act:

SECTION 23. Equality of Treatment in the Telecommunications Industry. Any advantage, favor,
privilege, exemption, or immunity granted under existing franchises, or may hereafter be granted,
shall ipso facto become part of previously granted telecommunications franchise and shall be
accorded immediately and unconditionally to the grantees of such franchises: Provided, however,
That the foregoing shall neither apply to nor affect provisions of telecommunications franchises
concerning territory covered by the franchise, the life span of the franchise, or the type of service
authorized by the franchise. [Emphasis supplied.]

As in the case of SMART v. City of Davao,[21] SMART posits that since the franchise of
telecommunications companies granted after the enactment of its franchise contained provisions
exempting these companies from both national and local taxes, these privileges should extend to
and benefit SMART, applying the equality clause above. The petitioner, on the other hand,
believes that the claimed exemption under Section 23 of the Public Telecoms Act is similarly
unfounded.

We agree with the petitioner.

Whether Section 23 of the cited law extends tax exemptions granted by Congress to new franchise
holders to existing ones has been answered in the negative in the case of PLDT v. City of Davao.
[22] The term exemption in Section 23 of the Public Telecoms Act does not mean tax exemption;
rather, it refers to exemption from certain regulatory or reporting requirements imposed by
government agencies such as the National Telecommunications Commission. The thrust of the
Public Telecoms Act is to promote the gradual deregulation of entry, pricing, and operations of all
public telecommunications entities, and thus to level the playing field in the telecommunications
industry. The language of Section 23 and the proceedings of both Houses of Congress are bereft of
anything that would signify the grant of tax exemptions to all telecommunications entities.[23]
Intent to grant tax exemption cannot therefore be discerned from the law; the term exemption is
too general to include tax exemption and runs counter to the requirement that the grant of tax
exemption should be stated in clear and unequivocal language too plain to be beyond doubt or
mistake.

Surcharge and Interests

Since SMART cannot validly claim any tax exemption based either on Section 9 of its franchise or
Section 23 of the Public Telecoms Act, it follows that petitioner can impose and collect the local
franchise and business taxes amounting to P764,545.29 it assessed against SMART. Aside from
these, SMART should also be made to pay surcharge and interests on the taxes due.

The settled rule is that good faith and honest belief that one is not subject to tax on the basis of
previous interpretation of government agencies tasked to implement the tax laws are sufficient
justification to delete the imposition of surcharges and interest.[24] In refuting liability for the
local franchise and business taxes, we do not believe SMART relied in good faith in the findings
and conclusion of the Bureau of Local Government and Finance (BLGF).

In a letter dated August 13, 1998, the BLGF opined that SMART should be considered exempt
from the franchise tax that the local government may impose under Section 137 of the LGC.[25]
SMART, relying on the letter-opinion of the BLGF, invoked the same in the administrative protest
it filed against petitioner on February 15, 2002, as well as in the petition for prohibition that it
filed before the RTC of Iloilo on April 30, 2002. However, in the 2001 case of PLDT v. City of
Davao,[26] we declared that we do not find BLGFs interpretation of local tax laws to be
authoritative and persuasive. The BLGFs function is merely to provide consultative services and
technical assistance to the local governments and the general public on local taxation, real
property assessment, and other related matters.[27] Unlike the Commissioner of Internal Revenue
who has been given the express power to interpret the Tax Code and other national tax laws,[28]
no such power is given to the BLGF. SMARTs dependence on BLGFs interpretation was thus
misplaced.

WHEREFORE, we hereby GRANT the petition and REVERSE the decision of the RTC dated
January 19, 2005 in Civil Case No. 02-27144 and find SMART liable to pay the local franchise
and business taxes amounting to P764,545.29, assessed against it by petitioner, plus the surcharges
and interest due thereon.

SO ORDERED.

ARTURO D. BRION
Associate Justice
WE CONCUR:

LEONARDO A. QUISUMBING
Associate Justice
Chairperson

CONCHITA CARPIO MORALES


Associate Justice
PRESBITERO J. VELASCO, JR.
Associate Justice

ANTONIO EDUARDO B. NACHURA


Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation before the case
was assigned to the writer of the opinion of the Courts Division.

LEONARDO A. QUISUMBING
Associate Justice
Chairperson

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairpersons Attestation,
it is hereby certified that the conclusions in the above Decision were reached in consultation
before the case was assigned to the writer of the opinion of the Courts Division.

REYNATO S. PUNO
Chief Justice

* Designated additional member of the Second Division per Special Order No. 571 dated February
12, 2009.
[1] Civil Case No. 02-27144.
[2] Decision dated January 19, 2005, penned by Judge Loida J. Diestro-Maputol; rollo, pp. 35-39.
[3] Id., p. 37.
[4] G.R. No. 155491, September 16, 2008.
[5] 35 Phil. 42 (1916).
[6] 49 Phil. 466 (1926).
[7] G.R. No. L-12134, November 30, 1961, 3 SCRA 591, citing House v. Posadas, 53 Phil. 338
(1929) and CIR v. Manila Jockey Club, Inc., 98 Phil. 670 (1956).
[8] G.R. No. L-23041 , July 31, 1969, 28 SCRA 1119, citing Memphis v. U & P Bank, 91 Tenn.
546, 550, and Farrington v. Tennessee and County of Shelby, 95 U.S. 679, 686.
[9] G.R. No. 156040, December 11, 2008.
[10] Rollo, p. 20.
[11] Philippine Long Distance Telephone Company, Inc. (PLDT) v. City of Bacolod, et al., G.R.
No. 149179, July 15, 2005, 463 SCRA 528; Mactan Cebu International Airport Authority v.
Marcos, G.R. No. 120082, September 11, 1986, 261 SCRA 667.
[12] Section 137. Franchise Tax. Notwithstanding any exemption granted by any law or other
special law, the province may impose a tax on businesses enjoying a franchise, at the rate not
exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts for the preceding
calendar year based on the incoming receipt, or realized within its territorial jurisdiction. x x x.
[Emphasis supplied.]
[13] SMART v. City of Davao, supra note 4.
[14] Id.
[15] G.R. No. 143867, March 25, 2003, 399 SCRA 442.
[16] Id.
[17] Amended by R.A. No. 9337 or the Revised Value-Added Tax Law (R-VAT Law).
[18] The tax rate is now 12% per R-VAT Law.
[19] Radio Communications of the Philippines, Inc. (RCPI) v. Provincial Assessor of South
Cotabato, et al., G.R. No. 144486, April 13, 2005, 456 SCRA 1.
[20] Digital Telecommunications Philippines, Inc. v. Province of Pangasinan, G.R. No. 152534,
February 23, 2007, 516 SCRA 541.
[21] Supra note 15.
[22] G.R. No. 143867, August 22, 2001, 363 SCRA 522; see also note 15.
[23] SMART v. City of Davao, supra note 4.
[24] Michel J. Lhuillier Pawnshop, Inc. v. Commissioner of Internal Revenue, G.R. No. 166786,
September 11, 2006, 501 SCRA 450, citing Connell Bros. Co. (Phil.) v. Collector of Internal
Revenue, 119 Phil. 40 (1963).
[25] Rollo, p. 48.
[26] Supra note 22; see also note 15.
[27] ADMINISTRATIVE CODE, Title II, Chapter 4, Section 33 (4)
[28] SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Cases. The power to
interpret the provisions of this Code [NIRC] and other tax laws shall be under the exclusive and
original jurisdictions of the Commissioner, subject to review by the Secretary of Finance. xxx.

SECOND DIVISION

NATIONAL POWER CORPORATION,


Petitioner,

- versus -

CENTRAL BOARD OF ASSESSMENT APPEALS (CBAA), LOCAL BOARD OF


ASSESSMENT APPEALS (LBAA) OF LA UNION, PROVINCIAL TREASURER, LA UNION
and MUNICIPAL ASSESSOR OF BAUANG, LA UNION,
Respondents.
G.R. No. 171470

Present:

QUISUMBING, J., Chairperson,


CORONA,*
CARPIO MORALES,
TINGA, and
BRION, JJ.
Promulgated:

January 30, 2009

x ---------------------------------------------------------------------------------------------- x

DECISION

BRION, J.:

What are the real property tax implications of a Build-Operate-Transfer (BOT) agreement between
a government-owned and controlled corporation (GOCC) that enjoys tax exemption and a private
corporation? Specifically, under the terms of the BOT Areement, can the GOCC be deemed the
actual, direct, and exclusive user of machineries and equipment for tax exemption purposes? If
not, can it pass on its tax-exempt status to its BOT partner, a private corporation, through the BOT
agreement?

The National Power Corporation (NAPOCOR) claims in this case that the machineries and
equipment used in a project covered by a BOT agreement, to which it is a party, should be
accorded the tax-exempt status it enjoys. The Local Board of Assessment Appeals of the Province
of La Union (LBAA), the Central Board of Assessment Appeals (CBAA) and the Court of Tax
Appeals (CTA) were one in rejecting NAPOCORs claim.

The present petition for review on certiorari filed under Rule 45 of the Rules of Court by
NAPOCOR challenges this uniform ruling and seeks the reversal of the CTAs Decision dated
February 13, 2006 in the consolidated cases of NAPOCOR v. CBAA, et al.[1] and Bauang Private
Power Corp. v. Sangguniang Panlalawigan ng La Union, et al.,[2] and of the denial of the motion
for reconsideration that followed.

THE ANTECEDENTS

On January 11, 1993, First Private Power Corporation (FPPC) entered into a BOT agreement with
NAPOCOR for the construction of the 215 Megawatt Bauang Diesel Power Plant in Payocpoc,
Bauang, La Union. The BOT Agreement provided, via an Accession Undertaking, for the creation
of the Bauang Private Power Corporation (BPPC) that will own, manage and operate the power
plant/station, and assume and perform FPPCs obligations under the BOT agreement. For a fee,[3]
BPPC will convert NAPOCORs supplied diesel fuel into electricity and deliver the product to
NAPOCOR.
The pertinent provisions of the BOT agreement, as they relate to the submitted issues in the
present case, read:

2.03 NAPOCOR shall make available the Site to CONTRACTOR for the purpose of building and
operating the Power Station at no cost to CONTRACTOR for the period commencing on the
Effective Date and ending on the Transfer Date and NAPOCOR shall be responsible for the
payment of all real estate taxes and assessments, rates, and other charges in respect of the Site and
the buildings and improvements thereon.

xxxx

2.08 From the date hereof until the Transfer Date, CONTRACTOR shall, directly or indirectly,
own the Power Station and all the fixtures, fittings, machinery, and equipment on the Site or used
in connection with the Power Station which have been supplied by it or at its cost and it shall
operate and manage the Power Station for the purpose of converting fuel of NAPOCOR into
electricity.

2.09 Until the Transfer Date, NAPOCOR shall, at its own cost, supply and deliver all Fuel for the
Power Station and shall take all electricity generated by the Power Station at the request of
NAPOCOR which shall pay to CONTRACTOR fees as provided in Clause 11.

xxxx

2.11 On the Transfer Date, the Power Station shall be transferred by the CONTRACTOR to
NAPOCOR without payment of any compensation.

The Officer-in-Charge of the Municipal Assessors Office of Bauang, La Union initially issued
Declaration of Real Property Nos. 25016 and 25022 to 25029 declaring BPPCs machineries and
equipment as tax-exempt. On the initiative of the Bauang Vice Mayor, the municipality questioned
before the Regional Director of the Bureau of Local Government Finance (BLGF) the declared tax
exemption; later, the issue was elevated to the Deputy Executive Director and Officer-in-Charge of
the BLGF, Department of Finance, who ruled that BPPCs machineries and equipments are subject
to real property tax and directed the Assessors Office to take appropriate action.

The Provincial/Municipal Assessors thereupon issued Revised Tax Declaration Nos. 30026 to
30033 and 30337, and cancelled the earlier issued Declarations of Real Property. The Municipal
Assessor of Bauang then issued a Notice of Assessment and Tax Bill to BPPC assessing/taxing the
machineries and equipments in the total sum of P288,582,848.00 for the 1995-1998 period, sans
interest of two percent (2%) on the unpaid amounts. BPPCs Vice-President and Plant Manager
received the Notice of Assessment and Tax Bill on August 7, 1998.

On October 5, 1998, NAPOCOR filed a petition (styled In Re Petition to Declare Exempt the
Revised and Retroactive to 1995 Tax Declaration Nos. 30026 to 30033 and 30037) with the
LBAA. The petition asked that, retroactive to 1995, the machineries covered by the tax
declarations be exempt from real property tax under Section 234(c) of Republic Act No. 7160 (the
Local Government Code or LGC); and, that these properties be dropped from the assessment roll
pursuant to Section 206 of the LGC. Section 234(c) of the LGC provides: [4]
Section 234. Exemptions from Real Property Tax. The following are exempted from the payment
of real property tax:

xxxx

(c) All machineries and equipment that are actually, directly and exclusively used by local water
districts and government-owned or controlled corporations engaged in the supply and distribution
of water and/or generation and transmission of electric power;

x x x x.

The LBAA denied NAPOCORs petition for exemption in a Decision dated October 26, 2001. It
ruled that the exemption provided by Section 234(c) of the LGC applies only when a government-
owned or controlled corporation like NAPOCOR owns and/or actually uses machineries and
equipment for the generation and transmission of electric power; in this case, NAPOCOR does not
own and does not even actually and directly use the machineries. It is the BPPC, a non-
government entity, which owns, maintains, and operates the machineries and equipment; using
these, it generates electricity and then sells this to NAPOCOR. Additionally, it ruled that the
liability for the payment of the real estate taxes is determined by law and not by the agreement of
the parties; hence, the provision in the BOT Agreement whereby NAPOCOR assumed
responsibility for the payment of all real estate taxes and assessments, rates, and other charges, in
relation with the site, buildings, and improvements in the BOT project, is an arrangement between
the parties that cannot be the basis in identifying who is liable to the government for the real estate
tax.

NAPOCOR appealed the LBAA ruling to the CBAA. BPPC moved to intervene on the ground
that it has a direct interest in the outcome of the litigation.[5] The CBAA subsequently dismissed
the appeal based on its finding that the BPPC, and not NAPOCOR, is the actual, direct and
exclusive user of the equipment and machineries; thus, the exemption under Section 234(c) does
not apply. The CBAA ruled:

Sec. 234 (c), R.A. 7160 (supra), is clear and unambiguous: there is no room for construction.
(citations omitted)

xxxx

Actual use, according to Sec. 199 (b) of R.A. 7160, refers to the purpose for which the property is
principally or predominantly utilized by the person in possession thereof. In Velez v. Locsin, 55
SCRA 152: The word use means to employ for the attainment of some purpose or end. In the
Operation of the Power Station (Clause 8.01 of the BOT Agreement), CONTRACTOR shall, at its
own cost, be responsible for the management, operation, maintenance and repair of the Power
Station during the Co-operation period x x x. Said Co-operation period is fifteen (15) years, after
which the Power Station will be turned over or transferred to NAPOCOR. Does this determine
when NAPOCOR should take over the actual, direct and exclusive use of the Power Station? That
is fifteen (15) years therefrom?

It has been established that BPPC manufactures or generates the power which is sold to
NAPOCOR and NAPOCOR distributes said power to the consumers. In other words, the
relationship between BPPC and NAPOCOR is one of manufacturer or seller and exclusive
distributor or buyer. The general perception is that the exclusive distributor or buyer of goods has
nothing to do with the manufacturing thereof but as exclusive distributor the latter has the right to
acquire all the goods to be sold to the exclusion of all others.

In terms of the definitions under Sec. 199 (b) and that offered by Respondents-Appelless (supra),
the machineries and equipment are principally or predominantly utilized by BPPC. In terms of the
Velez vs. Locsin case (supra), BPPC employs the machineries and equipment to attain its purpose
of generating power to be sold to NAPOCOR and collect payment therefrom to compensate for its
investment. The BOT Agreement is not a contract for nothing.

The following definitions are given by Blacks Law Dictionary, Third Edition:

Actually is opposed to seemingly, pretendedly, or feignedly, as actually engaged in farming means


really, truly in fact.

Directly. In a direct way without anything intervening; not by secondary, but by direct means.

Exclusively. Apart from all others; without admission of others to participation; in a manner to
exclude.

Indeed BPPC does not use said machineries and equipment pretendedly or feignedly but truly and
factually hence, actually. BPPC uses them without anything intervening hence, directly. BPPC
uses the same machineries and equipment apart from all others hence, exclusively. This is the fact
against the fact there is no argument. This same fact will also deny NAPOCORs claim to a ten
(10%) assessment level provided for under Sec. 218 of R.A. 7160 (supra) as to the requirement
thereto is simply the same as that in realty tax exemption. The BPPC is a private entity, not a
Government Owned or Controlled Corporation (GOCC), hence, not entitled to a 10% assessment
level.

NAPOCOR then filed with the CTA a petition for review, docketed as CTA E.B. No. 51, to
challenge the CBAA decision. BPPC filed its own petition for review of the CBAA decision with
the CTA which was docketed as CTA E.B. No. 58. The two petitions were subsequently
consolidated.
THE APPEALED CTA RULING

The CTA rendered on February 13, 2006 a decision dismissing the consolidated petitions. It ruled
on two issues: (1) whether BPPC seasonably filed its protest against the assessment; and (2)
whether the machineries and equipments are actually, directly, and exclusively used by
NAPOCOR in the generation and transmission of electric power, and are therefore not subject to
tax.

On the first issue, the CTA applied Section 226 of the LGC which provides the remedy from an
assessment as follows:

SEC. 226. Local Board of Assessment Appeals. Any owner or person having legal interest in the
property who is not satisfied with the action of the provincial, city or municipal assessor in the
assessment of his property may, within sixty (60) days from the date of receipt of the written
notice of assessment, appeal to the Board of Assessment Appeals in the province or city by filing a
petition under oath in the form prescribed for the purpose, together with copies of tax declarations
and such affidavits or documents submitted in support of the appeal.

It found that BPPC never filed an appeal to contest or question the assessment; instead, it was
NAPOCOR that filed the purported appeal a petition for exemption of the machineries and
equipment. The CTA, however, said that NAPOCOR is not the proper party, and the purported
appeal did not substantially comply with the requisites of the law.

According to the CTA, NAPOCOR is not the registered owner of the machineries and equipment.
These are registered in BPPCs name as further confirmed by Section 2.08 of the BOT Agreement.
[6] Thus, the CTA declared that until the transfer date of the power station, NAPOCOR does not
own any of the machineries and equipment, and therefore has no legal right, title, or interest over
these properties. Thus, the CTA concluded that NAPOCOR has no cause of action and no legal
personality to question the assessment. As the respondent local government units claim,
NAPOCOR is an interloper in the issue of BPPCs real estate tax liabilities.

The CTA additionally found that BPPCs subsequent attempt to question the assessment via a
motion for intervention with the CBAA failed to follow the correct process prescribed by the
Rules Governing Appeals to the CBAA;[7] its appeal was not accompanied by an appeal bond.

Also, the CTA found NAPOCORs petition to be an inappropriate remedy, as it is not the appeal
contemplated by law; NAPOCOR was in fact asserting an exemption on the basis of the
provisions of the BOT Agreement. An exemption is an evidentiary matter for the assessors, not for
the LBAA, to decide pursuant to Section 206 of the LGC;[8] NAPOCOR cannot simply bypass
the authority granted to concerned administrative agencies, as these available administrative
remedies must first be exhausted.

On the more substantive second issue, the CTA saw it clear from the BOT Agreement that BPPC
owns and uses the machineries and equipment in the power station, thus directly addressing and
disproving NAPOCORs actual, direct, and exclusive use argument. It noted that under the BOT
Agreement, NAPOCOR shall have a right over the machineries and equipments only after their
transfer at the end of the 15-year co-operation period. By the nature of the agreement and work of
BPPC, the [machineries] are actually, directly, and exclusively used by it in the conversion of
bunker fuel to electricity for [NAPOCOR] for a fee, the CTA said.

Section 234(c) of the LGC, according to the CTA, is clear. The exemption under the law does not
apply because BPPC is not a GOCC it is an independent power corporation currently operating
and maintaining the power plant pursuant to the BOT Agreement. The BOT agreement cannot
likewise be the basis for the claimed exemption; tax exemption cannot be agreed upon by mere
contract between the parties (BPPC and NAPOCOR), as it must be expressly granted by the
Constitution, statute, or franchise. A tax exemption, if and when granted, is also not transferrable,
as it is a personal privilege and it must be strictly construed, the CTA said in closing.

THE SEPARATE APPEALS


Thereupon, NAPOCOR and BPPC sought separate reviews of the CTA decision with us.

G.R. No. 173811

BPPC filed on September 11, 2006 its petition separately from NAPOCOR. The BPPC petition
was docketed as G.R. No. 173811 and was raffled to the First Division of the Court.

The First Division denied BPPCs petition in its Resolution dated October 4, 2006 on the reasoning
that BPPC failed to sufficiently show that the CTA committed any reversible error in the
challenged decision and resolution as to warrant the exercise of the Courts discretionary appellate
jurisdiction.

BPPC moved to reconsider the denial of its petition, but the Third Division (after the Courts
reorganization) denied the motion for reconsideration with finality after finding no substantial
arguments to warrant reconsideration. The resolution denying BPPCs petition for review had
become final and executory and was thus recorded in the Book of Entries of Judgment on April 3,
2007.

G.R. No. 171470 The Present Case

The NAPOCOR petition now pending with us was filed on April 6, 2006 and was docketed as
G.R. No. 171470. We required the respondents to comment on the petition in our Resolution of
May 3, 2006. The respondents filed the required comments. NAPOCOR subsequently filed its
Reply.

NAPOCOR cited the following as grounds for its petition:


I.
THE CTA ERRED ON A QUESTION OF LAW IN NOT RULING THAT PETITIONER IS THE
ACTUAL, DIRECT, AND EXCLUSIVE USER OF THE BAUANG DIESEL POWER PLANT.

II.

THE CTA ERRED ON A QUESTION OF LAW IN DISREGARDING THAT THE REAL


PROPERTY TAX EXEMPTION IS RETAINED UNDER R.A. NO. 7160.

III.

THE CTA ERRED ON A QUESTION OF LAW IN RULING THAT PETITIONER MUST BE


ENGAGED IN BOTH GENERATION AND TRANSMISSION OF POWER BEFORE THE
EXEMPTION UNDER SECTION 234(C) OF R.A. NO. 7160 CAN APPLY.

IV.

THE CTA ERRED ON A QUESTION OF LAW IN NOT CONSTRUING THE EXEMPTIONS


UNDER R.A. NO. 7160 IN HARMONY WITH PETITIONERS CHARTER AND THE BOT
LAW.

V.

ASSUMING THE 215 MW BAUANG DIESEL POWER PLANT IS TAXABLE, THE SAME
SHOULD BE CLASSIFIED AS SPECIAL FOR REAL PROEPRTY TAX PURPOSES SUBJECT
TO A 10% ASSESSMENT LEVEL, AND NOT AS COMMERCIAL/INDUSTRIAL
PROPERTIES SUBJECT TO AN 80% ASSESSMENT RATE.
In the interim and in light of the sale at public auction of the machineries and equipments,
NAPOCOR filed a Supplemental Petition based on the following grounds:
I.

THE CTA ERRED ON A QUESTION OF LAW IN DISMISSING PETITIONERS APPEAL


BECAUSE THE LATTER IS A GOVERNMENT INSTRUMENTALITY WHOSE FOREIGN
AND DOMESTIC INDEBTEDNESS ARE GUARANTEED BY THE NATIONAL
GOVERNMENT, IS THE BENEFICIAL OWNER OF THE SUBJECT POWER PLANT AND
[IS] THUS EXEMPT FROM THE PAYMENT OF REAL PROPERTY TAXES.

II.

THE CTA ERRED ON A QUESTION OF LAW IN DISMISSING PETITIONERS APPEAL


BECAUSE THIS LED TO THE SALE OF THE BAUANG POWER PLANT TO THE
PROVINCIAL GOVERNMENT OF LA UNION, THUS SERIOUSLY VIOLATING
PETITIONERS STATUTORY MANDATE TO CARRY OUT THE TOTAL ELECTRIFICATION
OF THE COUNTRY.

To support its claim that it is entitled to tax exemption as the actual, direct, and exclusive user of
the machineries and equipment, NAPOCOR argues that:

a. the BOT agreement is a financing agreement where it (NAPOCOR) is the beneficial owner and
the actual, direct, and exclusive user of the power plant, while BPPC is the lender/creditor that
retains the plants legal ownership until it is fully paid; the power plant is a NAPOCOR project and
BPPC is just the financier-contractor, and any BPPC activity is made on NAPOCORs behalf as a
contractor for NAPOCOR; in this way, NAPOCOR takes advantage of BPPCs financial resources
and technical expertise to secure a continuous supply of electric power.

b. its payment of energy fees, fixed operating fees, and other infrastructure fees to BPPC is not
inconsistent with its (NAPOCORs) beneficial ownership and actual, direct, and exclusive use of
the power plant, since the collection of the fees is the repayment scheme prescribed by Section
6[9] of Republic Act No. 6957,[10] as amended by Republic Act No. 7718 (BOT Law, as
amended); its amortizations over the 15-year co-operation period constitute full payment for the
power plant that would warrant the transfer of ownership without payment of additional
compensation; finally, that Republic Act No. 9136 or the Electric Power Industry Reform Act of
2001 has booked the power plant as NAPOCORs asset for privatization purposes.

c. its tax exemption should apply to a BOT project, citing the conditions that gave rise to the BOT
law and its own mandate to provide electricity nationwide; BOT projects are really government
projects where the private sector participates to provide the heavy initial financial requirements;
and that Congress specifically considered NAPOCORs situation in granting tax exemption to
machineries and equipment used in power generation and distribution.

d. in the interpretation of Section 234(c) of the LGC, related statutes must be considered and the
task of the courts is to harmonize all these laws, if possible; specifically, Section 234(c) of the
LGC was enacted to clarify or restore NAPOCORs real property tax exemption so that
NAPOCOR can perform its public function of supplying electricity to the entire country at
affordable rates, while the BOT law was enacted, among others, to authorize NAPOCOR to enter
into BOT contracts with the private sector so that NAPOCOR can carry out its mandate; the tax
exemption under Section 234(c) of the LGC must be given effect as the only legal and cogent way
of harmonizing it with NAPOCORs Charter and the BOT law.

NAPOCOR concludes that the CTAs ruling clearly defeats the spirit behind its creation, the
enactment of the BOT Law, and the tax exemption provision under the LGC.

THE COURTS RULING

We find the petition devoid of merit. Like the Courts First Division (later, Third Division) in G.R.
No. 173811, we find that NAPOCOR failed to sufficiently show that the CTA committed any
reversible error in its ruling.
NAPOCORs basis for its claimed exemption Section 234(c) of the LGC is clear and not at all
ambiguous in its terms. Exempt from real property taxation are: (a) all machineries and
equipment; (b) [that are] actually, directly, and exclusively used by; (c) [local water districts and]
government-owned or controlled corporations engaged in the [supply and distribution of water
and/or] generation and transmission of electric power.

We note, in the first place, that the present case is not the first occasion where NAPOCOR claimed
real property tax exemption for a contract partner under Sec. 234 (c) of the LGC. In FELS Energy,
Inc. v. The Province of Batangas[11] (that was consolidated with NAPOCOR v. Local Board of
Assessment Appeals of Batangas, et al.),[12] the Province of Batangas assessed real property taxes
against FELS Energy, Inc. the owner of a barge used in generating electricity under an agreement
with NAPOCOR. Their agreement provided that NAPOCOR shall pay all of FELS real estate
taxes and assessments. We concluded in that case that we could not recognize the tax exemption
claimed, since NAPOCOR was not the actual, direct and exclusive user of the barge as required by
Sec. 234 (c). In making this ruling, we cited the required standard of construction applicable to tax
exemptions and said:

Time and again, the Supreme Court has stated that taxation is the rule and exemption is the
exception. The law does not look with favor on tax exemptions and the entity that would seek to
be thus privileged must justify it by words too plain to be mistaken and too categorical to be
misinterpreted. Thus, applying the rule of strict construction of laws granting tax exemptions, and
the rule that doubts should be resolved in favor of provincial corporations, we hold that FELS is
considered a taxable entity.

The mere undertaking of petitioner NPC under Section 10.1 of the Agreement, that it shall be
responsible for the payment of all real estate taxes and assessments, does not justify the
exemption. The privilege granted to petitioner NPC cannot be extended to FELS. The covenant is
between FELS and NPC and does not bind a third person not privy thereto, in this case, the
Province of Batangas.

We also recognized this strictissimi juris standard in NAPOCOR v. City of Cabanatuan.[13] Under
this standard, the claimant must show beyond doubt, with clear and convincing evidence, the
factual basis for the claim. Thus, the real issue in a tax exemption case such as the present case is
whether NAPOCOR was able to convincingly show the factual basis for its claimed exception.

The records show that NAPOCOR, no less, admits BPPCs ownership of the machineries and
equipment in the power plant.[14] Likewise, the provisions of the BOT agreement cited above
clearly show BPPCs ownership. Thus, ownership is not a disputed issue.

Rather than ownership, NAPOCORs use of the machineries and equipment is the critical issue,
since its claim under Sec. 234(c) of the LGC is premised on actual, direct and exclusive use. To
support this claim, NAPOCOR characterizes the BOT Agreement as a mere financing agreement
where BPPC is the financier, while it (NAPOCOR) is the actual user of the properties.
As in the fact of ownership, NAPOCORs assertion is belied by the documented arrangements
between the contracting parties, viewed particularly from the prism of the BOT law.

The underlying concept behind a BOT agreement is defined and described in the BOT law as
follows:

Build-operate-and-transfer A contractual arrangement whereby the project proponent undertakes


the construction, including financing, of a given infrastructure facility, and the operation and
maintenance thereof. The project proponent operates the facility over a fixed term during which it
is allowed to charge facility users appropriate tolls, fees, rentals, and charges not exceeding those
proposed in its bid or as negotiated and incorporated in the contract to enable the project
proponent to recover its investment, and operating and maintenance expenses in the project. The
project proponent transfers the facility to the government agency or local government unit
concerned at the end of the fixed term which shall not exceed fifty (50) years x x x x.
Under this concept, it is the project proponent who constructs the project at its own cost and
subsequently operates and manages it. The proponent secures the return on its investments from
those using the projects facilities through appropriate tolls, fees, rentals, and charges not
exceeding those proposed in its bid or as negotiated. At the end of the fixed term agreed upon, the
project proponent transfers the ownership of the facility to the government agency. Thus, the
government is able to put up projects and provide immediate services without the burden of the
heavy expenditures that a project start up requires.

A reading of the provisions of the parties BOT Agreement shows that it fully conforms to this
concept. By its express terms, BPPC has complete ownership both legal and beneficial of the
project, including the machineries and equipment used, subject only to the transfer of these
properties without cost to NAPOCOR after the lapse of the period agreed upon. As agreed upon,
BPPC provided the funds for the construction of the power plant, including the machineries and
equipment needed for power generation; thereafter, it actually operated and still operates the
power plant, uses its machineries and equipment, and receives payment for these activities and the
electricity generated under a defined compensation scheme. Notably, BPPC as owner-user is
responsible for any defect in the machineries and equipment.[15]

As envisioned in the BOT law, the parties agreement assumes that within the agreed BOT period,
BPPC the investorprivate corporation shall recover its investment and earn profits through the
agreed compensation scheme; thereafter, it shall transfer the whole project, including machineries
and equipment, to NAPOCOR without additional cost or compensation. The latter, for its part,
derives benefit from the project through the fulfillment of its mandate of delivering electricity to
consumers at the soonest possible time, without immediately shouldering the huge financial
requirements that the project would entail if it were to undertake the project on its own. Its
obligation, in exchange, is to shoulder specific operating costs under a compensation scheme that
includes the purchase of all the electricity that BPPC generates.

That some kind of financing arrangement is contemplated in the sense that the private sector
proponent shall initially shoulder the heavy cost of constructing the projects buildings and
structures and of purchasing the needed machineries and equipment is undeniable. The
arrangement, however, goes beyond the simple provision of funds, since the private sector
proponent not only constructs and buys the necessary assets to put up the project, but operates and
manages it as well during an agreed period that would allow it to recover its basic costs and earn
profits. In other words, the private sector proponent goes into business for itself, assuming risks
and incurring costs for its account. If it receives support from the government at all during the
agreed period, these are pre-agreed items of assistance geared to ensure that the BOT agreements
objectives both for the project proponent and for the government are achieved. In this sense, a
BOT arrangement is sui generis and is different from the usual financing arrangements where
funds are advanced to a borrower who uses the funds to establish a project that it owns, subject
only to a collateral security arrangement to guard against the nonpayment of the loan. It is
different, too, from an arrangement where a government agency borrows funds to put a project
from a private sector-lender who is thereafter commissioned to run the project for the government
agency. In the latter case, the government agency is the owner of the project from the beginning,
and the lender-operator is merely its agent in running the project.

If the BOT Agreement under consideration departs at all from the concept of a BOT project as
defined by law, it is only in the way BPPCs cost recovery is achieved; instead of selling to facility
users or to the general public at large, the generated electricity is purchased by NAPOCOR which
then resells it to power distribution companies. This deviation, however, is dictated, more than
anything else, by the structure and usages of the power industry and does not change the BOT
nature of the transaction between the parties.

Consistent with the BOT concept and as implemented, BPPC the owner-manager-operator of the
project is the actual user of its machineries and equipment. BPPCs ownership and use of the
machineries and equipment are actual, direct, and immediate, while NAPOCORs is contingent
and, at this stage of the BOT Agreement, not sufficient to support its claim for tax exemption.
Thus, the CTA committed no reversible error in denying NAPOCORs claim for tax exemption.

For these same reasons, we reject NAPOCORs argument that the machineries and equipment must
be subjected to a lower assessment level. NAPOCOR cites as support Section 216 of the LGC
which provides:

Section 216. Special Classes of Real Property. - All lands, buildings, and other improvements
thereon actually, directly and exclusively used for hospitals, cultural, or scientific purposes, and
those owned and used by local water districts, and government-owned or controlled corporations
rendering essential public services in the supply and distribution of water and/or generation and
transmission of electric power shall be classified as special.

in relation with Section 218 (d) of the LGC which provides:


Section 218. Assessment Levels. - The assessment levels to be applied to the fair market value of
real property to determine its assessed value shall be fixed by ordinances of the Sangguniang
Panlalawigan, Sangguniang Panlungsod or Sangguniang Bayan of a municipality within the
Metropolitan Manila Area, at the rates not exceeding the following:
xxxx
(d) On Special Classes: The assessment levels for all lands buildings, machineries and other
improvements;
Actual Use
Assessment Level
Cultural
15%
Scientific
15%
Hospital
15%
Local water districts
10%
Government-owned or controlled corporations engaged in the supply and distribution of water
and/or generation and transmission of electric power
10%

Since the basis for the application of the claimed differential treatment or assessment level is the
same as the claimed tax exemption, the lower tribunals correctly found that there is no basis to
apply the lower assessment level of 10%.

As our last point, we note that a real concern for NAPOCOR in this case is its assumption under
the BOT agreement of BPPCs real property tax liability (which in itself is a recognition that
BPPCs real properties are not really tax exempt). NAPOCOR argues that if no tax exemption will
be recognized, the responsibility it assumed carries practical implications that are very difficult to
ignore. In fact, NAPOCORs supplemental petition is anchored on these practical implications the
alleged detriment to the public interest that will result if the levy, sale, and transfer of the
machineries and equipment were to be completed. NAPOCORs reference is to the fact that the
machineries and equipment have been sold in public auction and the buyer the respondent
Province will consolidate its ownership over these properties on February 1, 2009.

We fully recognize these concerns. However, these considerations are not relevant to our
disposition of the issues in this case. We are faced here with the application of clear provisions of
law and settled jurisprudence to a case that, to our mind, should not be treated differently solely
because of non-legal or practical considerations. Significantly, local government real property
taxation also has constitutional underpinnings, based on Section 5 of Article X of the Constitution,
[16] that we cannot simply ignore. In FELS

Energy, Inc. v. The Province of Batangas,[17] earlier cited, we said:


The power to tax is an incident of sovereignty and is unlimited in its magnitude, acknowledging in
its very nature no perimeter so that security against its abuse is to be found only in the
responsibility of the legislature which imposes the tax on the constituency who are to pay for it.
The right of local government units to collect taxes due must always be upheld to avoid severe tax
erosion. This consideration is consistent with the State policy to guarantee the autonomy of local
governments and the objective of the Local Government Code that they enjoy genuine and
meaningful local autonomy to empower them to achieve their fullest development as self-reliant
communities and make them effective partners in the attainment of national goals.
In conclusion, we reiterate that the power to tax is the most potent instrument to raise the needed
revenues to finance and support myriad activities of the local government units for the delivery of
basic services essential to the promotion of the general welfare and the enhancement of peace,
progress, and prosperity of the people. [Emphasis supplied.]

This ruling reminds us of the other side of the coin in terms of concerns and protection of
interests. La Union, as a local government unit, has no less than its own constitutional interests to
protect in pursuing this case. These are interests that this Court must also be sensitive to and has
taken into account in this Decision.

We close with the observation that our role in addressing the concerns and the interests at stake is
not all-encompassing. The Judiciary can only resolve the current dispute through our reading and
interpretation of the law. The other branches of government which act on policy and which
execute these policies, including NAPOCOR itself and the respondent local government unit, are
more in the position to act in tackling feared practical consequences. This ruling on the law can be
their springboard for action.

In light of these conclusions and observations, we need not discuss the other issues raised.

WHEREFORE, premises considered, we DENY NAPOCORs petition for lack of merit. We


AFFIRM the appealed decision of the Court of Tax Appeals. Costs against NAPOCOR.

SO ORDERED.

ARTURO D. BRION
Associate Justice

WE CONCUR:

LEONARDO A. QUISUMBING
Associate Justice
Chairperson
RENATO C. CORONA
Associate Justice

CONCHITA CARPIO MORALES


Associate Justice

DANTE O. TINGA
Associate Justice

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that the conclusions
in the above Decision were reached in consultation before the case was assigned to the writer of
the opinion of the Courts Division.

LEONARDO A. QUISUMBING
Acting Chief Justice

* Designated additional member per Special Order No. 558 dated January 15, 2009.
[1] Docketed as CTA E.B. No. 51.
[2] Docketed as CTA E.B. No. 58.
[3] 11. Fees
11.01 In respect of each Month from the Completion Date until and including the Month in which
the Transfer Date falls, NAPOCOR shall pay to BPPC Capacity Fees and Energy Fees calculated
as provided in the Eighth Schedule.
[4] The full text of Section 234 of the LGC reads as follows:

SEC. 234. Exemptions from Real Property Tax. - The following are exempted from payment of
the real property tax:
(a) Real property owned by the Republic of the Philippines or any of its political subdivisions
except when the beneficial use thereof has been granted, for consideration or otherwise, to a
taxable person;

(b) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques,


nonprofit or religious cemeteries and all lands, buildings, and improvements actually, directly, and
exclusively used for religious, charitable or educational purposes;

(c) All machineries and equipment that are actually, directly and exclusively used by local water
districts and government-owned or -controlled corporations engaged in the supply and distribution
of water and/or generation and transmission of electric power;

(d) All real property owned by duly registered cooperatives as provided for under R. A. No.
6938; and

(e) Machinery and equipment used for pollution control and environmental protection.

Except as provided herein, any exemption from payment of real property tax previously granted
to, or presently enjoyed by, all persons, whether natural or juridical, including all government-
owned or -controlled corporations are hereby withdrawn upon the effectivity of this Code.
[5] Rollo, pp. 194-195.
[6] Cited in p. 3.
[7] Rule IV, Section 7.
[8] SEC. 206. Proof of Exemption of Real Property from Taxation. - Every person by or for whom
real property is declared, who shall claim tax exemption for such property under this Title shall
file with the provincial, city or municipal assessor within thirty (30) days from the date of the
declaration of real property sufficient documentary evidence in support of such claim including
corporate charters, title of ownership, articles of incorporation, bylaws, contracts, affidavits,
certifications and mortgage deeds, and similar documents.
If the required evidence is not submitted within the period herein prescribed, the property shall be
listed as taxable in the assessment roll. However, if the property shall be proven to be tax exempt,
the same shall be dropped from the assessment roll.

[9] SEC. 6. Repayment Scheme. - For the financing, construction, operation and maintenance of
any infrastructure project undertaken through the build-operate-and-transfer arrangement or any of
its variations pursuant to the provisions of this Act, the project proponent shall be repaid by
authorizing it to charge and collect reasonable tolls, fees, and rentals for the use of the project
facility not exceeding those incorporated in the contract and, where applicable, the proponent may
likewise be repaid in the form of a share in the revenue of the project or other non-monetary
payments, such as, but not limited to, the grant of a portion or percentage of the reclaimed land,
subject to the constitutional requirements with respect to the ownership of land: Provided, That for
negotiated contracts, and for projects which have been granted a natural monopoly or where the
public has no access to alternative facilities, the appropriate government regulatory bodies, shall
approve the tolls, fees, rentals, and charges based on a reasonable rate of return: Provided, further,
That the imposition and collection of tolls, fees, rentals, and charges shall be for a fixed term as
proposed in the bid and incorporated in the contract but in no case shall this term exceed fifty (50)
years: Provided, furthermore, That the tolls, fees, rentals, and charges may be subject to
adjustment during the life of the contract, based on a predetermined formula using official price
indices and included in the instructions to bidders and in the contract: Provided, also, That all tolls,
fees, rentals, and charges and adjustments thereof shall take into account the reasonableness of
said rates to the end-users of private sector-built infrastructure: Provided, finally, That during the
lifetime of the franchise, the project proponent shall undertake the necessary maintenance and
repair of the facility in accordance with standards prescribed in the bidding documents and in the
contract. In the case of a build-and-transfer arrangement, the repayment scheme is to be effected
through amortization payments by the government agency or local government unit concerned to
the project proponent according to the scheme proposed in the bid and incorporated in the
contract.
[10] Entitled "AN ACT AUTHORIZING THE FINANCING, CONSTRUCTION, OPERATION
AND MAINTENANCE OF INFRASTRUCTURE PROJECTS BY THE PRIVATE SECTOR,
AND FOR OTHER PURPOSES
[11] G.R. No. 168557, February 16, 2007, 516 SCRA 186.
[12] G.R. No. 170628, February 16, 2007, 516 SCRA 186.
[13] G.R. No. 149110, April 9, 2003, 401 SCRA 259.
[14] Rollo, p. 19.
[15] See the provisions of Clause 8 of the BOT Agreement (rollo, pp. 85-86); some of the
pertinent provisions state:
8.01. CONTRACTOR, shall at its own cost, be responsible for the management, operation,
maintenance and repair of the Power Station during the co-operation period and shall use its best
endeavors to ensure that the Power Station is in good operating condition and capable of
converting Fuel supplied by NAPOCOR into electricity in a safe and stable manner within the
Operating Parameters.
8.04. In pursuance of its obligations under Clause 8.01, CONTRACTOR shall have the right to:

(i) Enter into contracts for the supply of materials and services, including contracts
with NAPOCOR;
(ii) xxxx
(iii) Purchase replacement equipment;

xxxx

[16] CONSTITUTION, Article X, Section 5. Each Local Government unit shall have the power to
create its own sources of revenue, to levy taxes, fees and charges subject to such guidelines and
limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such
taxes, fees and charges shall accrue exclusively to the Local Governments.
[17] Supra note 11, pp. 207-208.